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SECURE Act 2.0: Getting Closer to Reality
SECURE Act 2.0: Getting Closer to Reality SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer retirement plan benefits. The Securing a Strong Retirement Act, or ‘SECURE Act 2.0’ as it is commonly called, came much closer to being realized with the House passing the bill by a wide margin, 414-5, on March 29, 2022. This coming almost a full year after the House Ways and Means Committee unanimously approved the bill. It is now off to the Senate for approval. The bill builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans. Key provisions of SECURE Act 2.0 related to 401(k) plans include: Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt. Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee. Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5). The new bill increases the RMD age even further: to 73 in 2023; 74 in 2030 and ultimately 75 in 2033. Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2022. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64. Catch-up contributions must be made in Roth. Currently, participants can choose whether to contribute pre-tax or Roth as their catch-up contributions. The new bill requires that all catch-up contributions be made in Roth moving forward. This will provide less tax diversification for participants but will generate more tax revenue to help offset the cost of some of the other provisions in the bill. Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes. Ability to contribute matching contributions in Roth dollars. Currently, all employer matching contributions must be made on a pre-tax basis. The bill proposes that employers would be allowed to offer matching contributions to participants on a Roth basis. Roth matching contributions would not be deductible for employers as pre-tax contributions are, but may provide beneficial tax benefits to employees. Additional incentives for employees to contribute. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. The bill proposes that employers could now offer additional incentives, such as a small gift card benefit, to employees who contribute to their 401(k). One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to 2 years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan. Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act, employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2023 to allocate profit sharing and elective deferrals for the 2022 plan year. Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years. Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification. Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing. Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements. Retirement savings lost and found - SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs. -
Pros and Cons of the New York State Secure Choice Savings Program
Pros and Cons of the New York State Secure Choice Savings Program Answers to small businesses' frequently asked questions The New York State Secure Choice Savings Program was established to help the more than 3.5 million private-sector workers in the state who have no access to a workplace retirement savings plan. Originally enacted as a voluntary program in 2018, Gov. Kathy Hochul signed a law on Oct. 22, 2021, that requires all employees of qualified businesses be automatically enrolled in the state's Secure Choice Savings Program. If you’re an employer in New York, state laws require you to offer the Secure Choice Savings Program if you: Had 10 or more employees during the entire prior calendar year Have been in business for at least two years Have not offered a qualified retirement plan during prior two years If you’re wondering whether the Secure Choice Savings Program is the best choice for your employees, read on for answers to frequently asked questions. Do I have to offer my employees the Secure Choice Savings Program? No. State laws require businesses with 10 or more employees to offer retirement benefits, but you don’t have to elect the Secure Choice Savings Program if you provide a 401(k) plan (or another type of employer-sponsored retirement program). What is the Secure Choice Savings Program? The Secure Choice Savings Program is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the New York plan requires employers to automatically enroll employees at a 3% deferral rate. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice Savings Program provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. Why should I consider the Secure Choice Savings Program? The Secure Choice Savings Program is a simple, straightforward way to help your employees save for retirement. According to SHRM, it is managed by the program’s board, which is responsible for selecting the investment options. The state pays the administrative costs associated with the program until it has enough assets to cover those costs itself. When that happens, any costs will be paid out of the money in the program’s fund. Are there any downsides to the Secure Choice Savings Program? Yes, there are factors that may make the Secure Choice Savings Program less appealing than other retirement plans. Here are some important considerations: The Secure Choice Savings Program is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to the Secure Choice Savings Program—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. New York Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2022 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $20,500 in 2022 ($27,000 if they’re age 50 or older). So even if employees max out their contribution to the Secure Choice Savings Program, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, the Secure Choice Savings Program does not. Limited investment options—Secure Choice Savings Program offers a relatively limited selection of investments. Why should I consider a 401(k) plan instead of the Secure Choice Savings Program? For many employers—even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. What action should I take now? After the Secure Choice Savings Program opens for enrollment, you’ll have nine months to set up a payroll deposit retirement savings arrangement. No rollout date has been set yet, and the board can delay the program rollout as needed. We’ll keep you posted of any deadline updates. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. -
Employers Step Up and Stand Out with Student Loan Help
Employers Step Up and Stand Out with Student Loan Help Here's why more companies are taking an active role. Your staff could very well be loaded up with student loan debt. Heck, you might even have some yourself. None of this is news. But as student loan debt continues to snowball in the U.S.–up to $1.75 trillion as of late 2021– you may be less familiar with the all-hands-on-deck mentality many employers are now taking toward the problem. Companies are getting off the sideline and taking a more active role in helping their workers manage student loans. Here’s how and, more importantly, why. Why companies are adding student loan help to their benefits toolbox The story of how companies came to help with student loans is really the story of the 401(k), or more specifically, why so many employees weren’t touching theirs. A mystery at first, the answer has grown increasingly clear: it’s tough to save for the future when you’re still paying off the past. For employees with student loans, every dollar in their paychecks can represent a zero-sum decision. Do they service their student loans or contribute to their 401(k)? In recent years, however, both employers and employees have signaled a growing expectation to work together on the issue. More than half (57%) of employees believe their company should help them pay off student loans according to exclusive Betterment research on employee financial wellness. Savvy companies have taken the issue to heart. By complementing their 401(k) with student loan management, they can offer a more holistic compensation package, one that accounts for the drag student loan debt now has on the workforce as a whole. The benefits are numerous: Recruiting and retention advantages When it comes to benefits packages, 401(k)s have become the standard. Translation: beyond a generous match, they don’t always differentiate your company from others. Offering something of unique value can not only attract top talent but keep it. Nearly 9 out of 10 (86%) of young workers say they'd stay at least five years with a company if it helped with student loans. Two-way tax benefits Just like with 401(k)s, offering your staff a student loan management tool is one thing, but the real magic lies in the match. Why is that? It unlocks tax perks for both parties. Thanks to legislation passed by Congress in 2020 (aka the CARES Act), companies can make tax-free annual contributions of up to $5,250 toward their employees’ student loans. This translates into a benefit that lowers both your company’s payroll taxes and your employees’ income taxes. This tax-free treatment is approved through 2025, and support is building for making it permanent. What to look for in a Student Loan Management tool First and foremost, you want a streamlined admin experience. For many benefits admins, adding another vendor on top of their 401(k) provider is a non-starter. The last thing you need is another login. With Betterment, you can get both benefits synced and served up at the same time. If you’re already familiar with Betterment’s 401(k) product, Student Loan Management slots into that experience seamlessly. Last but certainly not least, you want a tool that also makes your employees’ lives easier. Similar to the admin experience, we give your participants a clearer financial picture of their student loans and 401(k) all in one place. We also go the extra mile by helping them balance the competing demands of debt and investing. This tension, after all, is a big reason for student loan help’s rise as a bona fide benefit. It’s our mission to help you and your staff ease it. -
How to Help Your Employees Deal with Financial Stress
How to Help Your Employees Deal with Financial Stress Employee financial concerns can have a major impact on your business. Learn what you can do to help ease employee financial stress. The COVID-19 crisis isn’t just a risk to our physical health—it’s also a risk to our economic health. In fact, a new survey from the National Endowment for Financial Education® (NEFE), revealed that nearly 9 in 10 Americans say that the pandemic is causing stress on their personal finances. With the unemployment rate hovering around 13%, many people are struggling to pay for housing, food, and other necessities. And even those who have jobs are feeling the squeeze. According to NEFE, the top ten financial stressors are: Having enough in emergency savings – 41% Job security – 39% Income fluctuations – 29% Paying utilities – 28% Paying rent or mortgage – 28% Financial market volatility – 25% Paying down/off credit card debt – 23% Having enough saved for retirement – 23% Paying health care bills – 19% Putting off major financial decisions – 17% Pandemic or no pandemic—many employees are feeling financial stress Between juggling childcare responsibilities and working from home, it’s no secret that employees are facing added pressure right now. Some may be forced to dramatically reduce their expenses because their spouse or partner has lost their job or had their hours reduced. Others may be caring for a sick relative—or even experiencing medical issues themselves. The pandemic has undoubtedly caused unprecedented levels of financial stress; however, even in the best of times, many employees are in financially precarious positions. In fact, according to research from Willis Towers Watson—conducted before the pandemic hit the United States—nearly two in five employees live paycheck to paycheck. And it’s not only those at lower income levels who are affected; even highly paid workers with generous employee benefits employees struggle financially. Notably, the survey of employees found that: 39% could not come up with $3,000 if an unexpected need arose within the next month 18% making more than $100,000 per year live paycheck to paycheck 70% are saving less for retirement than they think they should 32% have financial problems that negatively affect their lives 64% believe their generation is likely to be much worse off in retirement than that of their parents Employee financial concerns can have a major impact on your business Wondering what your employees are most concerned about? According to Fidelity Investments’® 2020 New Year Financial Resolutions Study, Americans’ top five financial concerns are: Unexpected expenses Personal debt (e.g., credit cards, mortgage, student loans) Not saving enough for short-term and/or long-term needs (e.g., retirement) Rising health care costs The economy, stock market volatility, or interest rates These financial challenges can increase stress levels, hurt job performance, and even damage health. Willis Towers Watson took a deeper dive into the attitudes of struggling employees who live paycheck to paycheck, and found that: 39% said money concerns keep them from doing their best at work 49% reported suffering from stress, anxiety or depression over the past two years (compared with 16% of employees without any financial worries) Only 39% of struggling employees were fully engaged at work If that’s not bad enough, a report from Salary Finance found that employees with money worries are 8.1 times more likely to have sleepless nights, 5.8 times more likely to not finish daily tasks, 4.3 times more likely to have troubled relationships with work colleagues, and 2.2 times more likely to be looking for a new job. As you can imagine, these feelings of disengagement, dissatisfaction, and anxiety can wreak havoc on employee wellbeing—and on your bottom line. In fact, Gallup research shows that U.S. businesses are losing a trillion dollars every year due to voluntary turnover. Companies may also experience reduced lost productivity, additional medical insurance expenses, increased absenteeism, and other unanticipated side effects of a workforce that’s financially stressed. More money isn’t always the answer It’s easy to read the statistics and think, “well, maybe we should just pay our employees more.” While your employees may appreciate a bonus or a raise—and it may temporarily ease some financial stress—it won’t solve the whole problem. Even highly paid employees experience financial stress because it’s less about the money and more about the money management and financial literacy. In fact, a Merrill Edge survey of more than 1,000 mass affluent Americans found that: 59% believe their financial life impacts their mental health 56% believe their financial life impacts their physical health 51% are worried about their finances over the next five years Excluding their mortgages, 73% are carrying some form of debt What can you do to help ease employee financial stress? You don’t need a big, expensive financial wellness program to help your employees. To begin, think about financial wellness benefits resources you already have at your disposal: Does your health insurance plan have an Employee Assistance Program (EAP)? In addition to helping employees navigate health care issues, EAPs frequently offer advice on budgeting, debt consolidation, retirement savings planning, and more. Do you have an in-house expert? Enlist your CFO or another financially savvy manager, CFO, or HR professional, to share savings tips or lead an information session to address common financial issues. answer commonly asked financial questions. Do you offer a 401(k) plan? If so, your 401(k) provider 401(k) provider likely offers a variety of educational tools and resources to help employees budget and save for retirement (and beyond). By leveraging these resources, you can begin the process of improving employee financial wellbeing. Betterment can help At Betterment, our mission is simple: to empower people to do what’s best for their money so they can live better. By using our innovative, online platform, employees can plan for their long- and short-term financial goals ranging from retirement to an emergency fund to a new house. Betterment’s unique technological solution: Takes into account employees’ ages, savings, and goals to create a personalized plan to help them save for the future they want Enables employees to link their outside assets, making it easy for them to see the full picture of their personal finances Can boost employees’ after-tax returns Beyond saving for retirement, Betterment helps employees gain control of their finances so they can reduce their stress and focus on what matters most. -
ESG Investments in 401(k) Plans: Part 2
ESG Investments in 401(k) Plans: Part 2 The new DOL proposal provides clarity with ESG investing.In the beginning of 2021, we discussed the US Department of Labor (DOL)’s “final rule” entitled “Financial Factors in Selecting Plan Investments,” pertaining to ESG (environmental, social, governance) investments within a 401(k) plan. In March, the DOL under the Biden administration stated that they were not going to enforce the previous administration’s rule until they had completed their own review. Most recently, the Biden DOL released its own proposal, reworking parts of the rule to be more favorable to the inclusion of ESG investments within 401(k)s and clarifying areas that had a chilling effect on fiduciaries performing their responsibilities. So what’s changed? 2020 Rule New Proposal Evaluating investments Investment choices must be based on “pecuniary” factors, which include time horizon, diversification, risk, and return. Clarifies that ESG factors are permissible and are financially material in the consideration of investments. Qualified default investment alternative (QDIA) Cannot select investment based on one or more non-pecuniary factors. ESG factors are permissible, allowing the possibility of wider adoption of ESG funds and portfolios. Tie-breaker test (when deciding between investments) Non-financial factors such as ESG are permissible. However, they must have detailed documentation. Permitted to select investments based on “collateral benefits” such as ESG. Where collateral benefits form the basis for investment choice, disclosure of collateral benefits required. Detailed tie-breaker documentation not required. Proxy voting Fiduciaries are not required to vote every proxy or exercise every shareholder right. Revised language stresses the importance of proxy voting in line with fiduciary obligations. Special monitoring for proxy voting when outsourcing responsibilities. Proxy voting activities must be recorded. Additional special monitoring is not required. Removal of record keeping of proxy activities. Safe harbors: a fiduciary can choose not to vote proxy if (a) the proposal is related to business activities or investment value (b) percentage ownership or the proposal being voted on is not significant enough to materially impact. Removal of safe harbors. Voting to further political or social causes “that have no connection to enhancing the economic value of the plan's investment” through proxy voting or shareholder activism is a violation. Opens the door to ESG factors when voting proxies as under the proposed rule that they are economically material. Why is this important? Under the new proposal, the DOL clarifies that “climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.” Under the previous rule, many ESG factors would not count as a “pecuniary” factor. However, in actuality ESG factors have a high likelihood of impacting financial performance in the long run. For example, climate change can shift environmental conditions, force companies to transition and adapt to these shifts, lead to disruptions in business cycles and new innovations, and ultimately be a material financial risk over time when a company declines from failing to adapt. For retirement plans, the DOL’s revised proposal acknowledges that ESG risks could be important to consider when reviewing investments for strategic portfolio construction. Driving impact through ESG investing and proxy voting works. We’ve seen this concept in action with Engine No.1 winning three ExxonMobil board seats in a six month long proxy battle. The change in having three new board members that are conscious of climate change and favor transitioning away from fossil fuels will benefit the company in the long term as renewable energy grows in prominence. After its successful proxy battle with Exxon, Engine No. 1 reported cordial discussions with representatives of Chevron Corp. regarding the company’s emissions reduction strategy, and also has reportedly built a stake in General Motors and expressed support for GM’s management actions relating to increased electric vehicle production and GM’s long-term strategy. Ernst & Young also published data showing an increasing trend of how more Fortune 100 companies are incorporating ESG initiatives into proxy statements. For example, 91% disclosed they are incorporating workplace diversity into their initiatives in 2021 versus 61% in 2020. Demand for ESG products will continue We believe demand for ESG-focused investing will continue to grow, and it is important that regulations are clarified to accommodate this trend. Bloomberg projects that global assets in ESG will exceed $50 trillion by 2025, which is significant as it will represent a third of projected global assets under management. In the US, $17 trillion is invested in ESG assets. Trends within ESG ETFs tell the same story where fund flows this year have increased by more than 1000% compared to flows seen just three years ago. How Betterment incorporates ESG investing in 401(k) plans At Betterment, we believe investing through an ESG lens matters, especially within 401(k) plans which tend to have a longer time horizon. We’ve found many ways to thoughtfully weave ESG investing into our portfolio strategies. Betterment has a 10+ years track record of constructing globally diversified portfolios, along with a history of implementing ESG investment strategies in 401(k)s using our Socially Responsible Investing (SRI) portfolios. The SRI portfolios come in three different flavors: Broad Impact, Social Impact, and Climate Impact. Each of these portfolios allow our clients to choose how they want to invest to best align their portfolio with their values. Perceptions of higher fees in the ESG investment space has been a misconception that has historically posed an obstacle to the adoption of pro-ESG regulation. Expense ratios of ESG ETFs have declined to 0.20%, which is low compared to the 0.53% average expense ratio of all ETFs in the US. Within Betterment’s SRI portfolios, and depending on the investor’s overall portfolio allocation to stocks relative to bonds, the asset weighted expense ratios of the Broad Impact, Social, and Climate portfolios range from 0.12-0.18%, 0.13-0.20%, 0.13-0.20% respectively. Another misconception is that in order to adopt ESG investing, you have to sacrifice performance goals. As a 3(38) investment fiduciary, Betterment reviews fund selection on an ongoing basis to ensure we’ve performed our due diligence in selecting investments suitable for participants' desired investing objectives. To determine if there were in fact any financial tradeoffs associated with an SRI portfolio strategy relative to the Betterment Core, we examined evidence based on both historical and forward-looking returns. When adjusting for the stock allocation level and Betterment fees, we found that: There were no material performance differences The portfolios were highly correlated overall Over certain time horizons the SRI portfolios actually outperformed the Betterment Core portfolio In the table below, we compare the equity ESG ETFs that we invest in our Broad Impact portfolio and the broad market capitalization weighted equity ETFs that we invest in our Core portfolio strategy. ETF Ticker ETF Fund Name Exposure 3 months 6 months Year to Date 1 Year 3 Years* Since Common Inception Period* (12/23/2016) ESGU iShares ESG Aware MSCI USA ETF US ESG 0.28% 8.99% 15.35% 30.60% 17.19% 17.37% VTI Vanguard Total Stock Market ETF US -0.06% 8.21% 15.18% 32.09% 16.00% 16.50% ESGD iShares ESG Aware MSCI EAFE ETF International Developed ESG -0.79% 4.55% 8.15% 26.05% 8.12% 10.03% VEA Vanguard FTSE Developed Markets ETF International Developed -1.52% 4.08% 8.26% 26.60% 8.19% 10.08% ESGE iShares ESG Aware MSCI EM ETF Emerging Markets ESG -7.98% -2.78% -0.79% 19.04% 9.65% 11.87% VWO Vanguard FTSE Emerging Markets ETF Emerging Markets -6.94% -2.14% 1.37% 18.47% 9.63% 10.58% Source: Bloomberg, Betterment as of 9/30/2021. Market performance information is based on the returns of ETFs tracked by Betterment, using returns data from Bloomberg, for the time periods ending in 9/30/2021. Fund-level fees are included in each ETF return and dividends are assumed to be reinvested in the fund from which the dividend was distributed. Performance is provided for illustrative purposes to compare broad market ETFs to the ESG ETFs that are used in some of the Betterment Socially Responsible Investing (SRI) portfolios. The ETF performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used in the Betterment SRI portfolios will differ from the performance of the returns reflected here.*Periods longer than 1 year are annualized. Our forward-looking analysis does not provide any basis for concluding that, over the long term, there will be a meaningful difference in performance between our SRI and Betterment Core portfolios. You can read about our full methodology and performance testing in our SRI Portfolios white paper. Another example of how we’ve incorporated ESG impact investing is through the addition of the Engine No. 1 Transform 500 ETF (VOTE) into all three of our SRI portfolio strategies last quarter. With VOTE ETF, you can still maintain exposure to the 500 largest companies within the US at an inexpensive expense ratio of 0.05%. That may seem counterintuitive since it mirrors owning the S&P 500 Index, however the magic happens behind the scenes as the fund manager uses share ownership to vote proxies in favor of ESG initiatives. This is a new form of shareholder activism and another way performance goals, exposure, and fees do not have to be sacrificed to make a difference. What’s next? We are hopeful that ease of interpretation with this rule may allow wider adoption of ESG products as investment options and may lead to greater incorporation of ESG factors in the decision making process as we do believe they are material. This has been a focus of Betterment’s as we seek to remain ahead of the trend with our product solutions. The public comment period for the proposed rule begins Thursday, Oct. 14 and will close on Dec. 13. We will continue to monitor ongoing developments and keep you informed. Note: Higher bond allocations in your portfolio decrease the percentage attributable to socially responsible ETFs. -
Plan Design Matters
Plan Design Matters Thoughtful 401(k) plan design can help motivate even reluctant retirement savers to start investing for their future. Designing a 401(k) plan is like building a house. It takes care, attention, and the help of a few skilled professionals to create a plan that works for both you and your employees. In fact, thoughtful plan design can help motivate even reluctant retirement savers to start investing for their future. How to tailor a 401(k) plan you and your employees will love As you embark on the 401(k) design process, there are many options to consider. In this article, we’ll take you through the most important choices so you can make well-informed decisions. Since certain choices may not be available on the various pricing models of any given provider, make sure you understand your options and the trade-offs you’re making. Let’s get started! 401(k) eligibility When would you like employees to be eligible to participate in the plan? You can opt to have employees become eligible: Immediately – as soon as they begin working for your company After a specific length of service – for example, a period of hours, months, or years of service It’s also customary to have an age requirement (for example, employees must be 18 years or older to participate in the plan). Plus, you may want to add an “employee class exclusion” to prevent part-time, seasonal, or temporary employees from participating in the plan. Once employees become eligible, they can immediately enroll – or, you can restrict enrollment to a monthly, quarterly, or semi-annual basis. If you have immediate 401(k) eligibility and enrollment, in theory, more employees could participate in the plan. However, if your company has a higher rate of turnover, you may want to consider adding service length requirements to alleviate the unnecessary administrative burden of having to maintain many small accounts of employees who are no longer with your organization. Enrollment Enrollment is another important feature to consider as you structure your plan. You may simply allow employees to enroll on their own, or you can add an automatic enrollment feature. Automatic enrollment (otherwise known as auto-enrollment) allows employers to automatically deduct elective deferrals from employees’ wages unless they elect not to contribute. With automatic enrollment, all employees are enrolled in the plan at a specific contribution rate when they become eligible to participate in the plan. Employees have the freedom to opt out and change their contribution rate and investments at any time. As you can imagine, automatic enrollment can have a significant impact on plan participation. In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! That’s in stark contrast to the roughly 50% participation rate for plans in which employees must actively opt in. If you decide to elect automatic enrollment, consider your default contribution rate carefully. A 3% default contribution rate is still the most popular; however, more employers are electing higher default rates because research shows that opt-out rates don’t appreciably change even if the default rate is increased. Many financial experts recommend a savings rate of at least 10%, so using a higher automatic enrollment default rate gets employees even more of a head start. Auto-escalation Auto-escalation is an important feature to look out for as you design your plan. It enables employees to increase their contribution rate over time as a way to increase their savings. With auto-escalation, eligible employees will automatically have their contribution rate increased by 1% every year until they reach a maximum cap of 15%. Employees can also choose to set their own contribution rate at any time, at which point they will no longer be enrolled in the auto-escalation feature. For example, if an employee is auto-enrolled at 6% with a 1% auto-escalation rate, and they choose to change their contribution rate to 8%, they will no longer be subject to the 1% increase every year. Compensation You’re permitted to exclude certain types of compensation for plan purposes, including compensation earned prior to plan entry and fringe benefits for purposes of compliance testing and allocating employer contributions. You may choose to define your compensation as: W2 (box 1 wages) plus deferrals – Total taxable wages, tips, prizes, and other compensation 3401(a) wages – All wages taken into account for federal tax withholding purposes, plus the required additions to W-2 wages listed above Section 415 Safe Harbor – All compensation received from the employer which is includible in gross income Employer contributions Want to encourage employees to enroll in the plan? Free money is a great place to start! That’s why more employers are offering profit sharing or matching contributions. In fact, EBRI and Greenwald & Associates’ found that nearly 73% of workers said they were likely to save for retirement if their contributions were matched by their employer. Some of the more common employer contributions are: Safe harbor contributions – With the added bonus of being able to avoid certain time-consuming compliance tests, safe harbor contributions often follow one of these formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. Discretionary matching contributions – You decide what percentage of employee 401(k) deferrals to match and the maximum percentage of pay to match. For example, you could elect to match 50% of contributions on up to 6% of compensation. One advantage of having a discretionary matching contribution is that you retain the flexibility to adjust the matching rate as your business needs change. Non-elective contributions – Each pay period, you have the option of contributing to your employees’ 401(k) accounts, regardless of whether they contribute. For example, you could make a profit sharing contribution (one type of non-elective contribution) at the end of the year as a percentage of employees’ salaries or as a lump-sum amount. In addition to helping your employees build their retirement nest eggs, employer contributions are also tax deductible (up to 25% of total eligible compensation), so it may cost less than you think. Plus, offering an employer contribution can play a key role in recruiting and retaining top employees. In fact, a Betterment for Business study found that more than 45% of respondents considered a 401(k) match to be a factor when deciding whether to accept a job. 401(k) vesting If you elect to make an employer contribution, you also need to decide on a vesting schedule (an employee’s own contributions are always 100% vested). Note that all employer contributions made as part of a safe harbor plan are immediately and 100% vested. The three main vesting schedules are: Immediate – Employees are immediately vested in (or own) 100% of employer contributions as soon as they receive them. Graded – Vesting takes place in a gradual manner. For example, a six-year graded schedule could have employees vest at a rate of 20% a year until they are fully vested. Cliff – The entire employer contribution becomes 100% vested all at once, after a specific period of time. For example, if you had a three-year cliff vesting schedule and an employee left after two years, they would not be able to take any of the employer contributions (only their own). Like your eligibility and enrollment decisions, vesting can also have an impact on employee participation. Immediate vesting may give employees an added incentive to participate in the plan. On the other hand, a longer vesting schedule could encourage employees to remain at your company for a longer time. Service counting method If you decide to use length of service to determine your eligibility and vesting schedules, you must also decide how to measure it. Typically, you may use: Elapsed time – Period of service as long as employee is employed at the end of period Actual hours – Actual hours worked. With this method, you’ll need to track and report employee hours Actual hours/equivalency – A formula that credits employees with set number of hours per pay period (for example, monthly = 190 hours) 401(k) withdrawals and loans Naturally, there will be times when your employees need to withdraw money from their retirement accounts. Your plan design will have rules outlining the withdrawal parameters for: Termination In-service withdrawals (at attainment of age 59 ½; rollovers at any time) Hardships Qualified Domestic Relations Orders (QDROs) Required Minimum Distributions (RMDs) Plus, you’ll have to decide whether to allow participants to take 401(k) plan loans (and the maximum amount of the loan). While loans have the potential to derail employees’ retirement dreams, having a loan provision means employees can access their money if they need it and employees can pay themselves back plus interest. If employees are reluctant to participate because they’re afraid their savings will be “locked up,” then a loan provision can help alleviate that fear. Investment options When it comes to investment methodology, there are many strategies to consider. Your plan provider can help guide you through the choices and associated fees. For example, at Betterment, we believe that ETFs offer investors significant diversification and flexibility at a low cost. Plus, we offer ETFs in conjunction with personalized, unbiased advice to help today’s retirement savers pursue their goals. Get help from the experts Your 401(k) plan provider can walk you through your plan design choices and help you tailor a plan that works for your company and your employees. Once you’ve settled on your plan design, you will need to codify those features in the form of a formal plan document to govern your 401(k) plan. At Betterment, we draft the plan document for you and provide it to you for review and final approval. Your business is likely to evolve—and your plan design can evolve, too. Drastic increase in profits? Consider adding an employer match or profit sharing contribution to share the wealth. Plan participation stagnating? Consider adding an automatic enrollment feature to get more employees involved. Employees concerned about access to their money in an uncertain world? Consider adding a 401(k) loan feature. Need a little help figuring out your plan design? Talk to Betterment. Our experts make it easy for you to offer your employees a better 401(k) quickly and easily—all for a fraction of the cost of most providers. -
401(k) Considerations for Highly Compensated Employees
401(k) Considerations for Highly Compensated Employees Help ensure your 401(k) plan benefits every employee – from senior executives to entry-level workers. Read on for more information. Smart savers 401(k) considerations for highly compensated employees A 401(k) plan should help every employee – from senior executives to entry-level workers – save for a more comfortable future. To help ensure highly compensated employees (HCEs) don’t gain an unfair advantage through the 401(k) plan, the IRS implemented certain rules that all plans must follow. Wondering how to navigate these special considerations for HCEs? Read on for answers to commonly asked questions. 1. What is an HCE? According to the IRS, an HCE is an individual who: Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or Received compensation from the business of more than $130,000 (if the preceding year is 2020 or 2021), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation. 2. Why are there special considerations for HCEs? Does your plan offer a company match? If so, consider this example: Joe is a senior manager earning $200,000 a year. He can easily afford to max out his 401(k) plan contributions and earn the full company match (dollar-for-dollar up to 6%). Thomas is an entry-level administrative assistant earning $35,000 a year. He can only afford to contribute 2% of his paycheck to the 401(k) plan, and therefore, isn’t eligible for the full company match. Not only that, Joe can contribute more – and earn greater tax benefits – than Thomas. It doesn’t seem fair, right? The IRS doesn’t think so either. To ensure HCEs don’t disproportionately benefit from the 401(k) plan, the IRS requires annual compliance tests known as non-discrimination tests. 3. What is non-discrimination testing? In order to retain tax-qualified status, a 401(k) plan must not discriminate in favor of key owners and officers, nor highly compensated employees. This is verified annually by a number of tests, which include: Coverage tests – These tests review the ratio of HCEs benefitting from the plan (i.e., of employees considered highly compensated, what percent are benefiting) against the ratio of non-highly compensated employees (NHCEs) benefiting from the plan. Typically, the NHCE percentage benefiting must be at least 70% or 0.7 times the percentage of HCEs considered benefiting for the year, or further testing is required. These tests are performed across employee contributions, matching, and after-tax contributions, and non-elective (employer, non-matching) contributions. ADP and ACP tests – The Actual Deferral Percentage (ADP) Test and the Actual Contribution Percentage (ACP) Test help to ensure that HCEs are not saving significantly more than the employee base. The tests compare the average deferral (traditional and Roth) and employer contribution (matching and after-tax) rates between HCEs and NHCEs. Top-heavy test – A plan is considered top-heavy when the total value of the Key employees’ plan accounts is greater than 60% of the total value of the plan assets. (The IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.) 4. What if my plan doesn’t pass non-discrimination testing? You may be surprised to learn that it’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. If your plan fails, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! Not to mention the fact that you may upset several top employees, which could have a detrimental impact on employee satisfaction and retention. 5. How can I avoid this headache-inducing situation? If you want to bypass compliance tests, consider a safe harbor 401(k) plan. A safe harbor plan is like a typical 401(k) plan except it requires you to: Contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan Ensure the mandatory employer contribution vests immediately – rather than on a graded or cliff vesting schedule – so employees can always take these contributions with them when they leave To fulfill safe harbor requirements, you can elect one of the following employer contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. Want to contribute more? You absolutely can – the above percentages are only the minimum required of a safe harbor plan. 6. How can a safe harbor plan benefit my top earners? With a safe harbor 401(k) plan, you can ensure that your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing). 7. What are the upsides (and downsides) of a safe harbor plan? Beyond ensuring your HCEs can max out their contributions, a safe harbor plan can help you: Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future). Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve company productivity and profitability. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Bypass certain tests altogether by electing a safe harbor 401(k). Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan. Of course, these benefits come with a cost; specifically the expense of increasing your overall payroll by 3% or more. So be sure to evaluate whether your company has the financial capacity to make employer contributions on an annual basis. 8. Are there other ways for HCEs to save for retirement? If you decide against a safe harbor plan, you can always encourage your HCEs to take advantage of other retirement-saving avenues, including: Health savings account (HSA) – If your company offers an HSA – typically available to those enrolled in a high-deductible health plan (HDHP) – individuals can contribute up to $3,600, families can contribute up to $7,200, and employees age 55 or older can contribute an additional $1,000 in 2021. The key benefits are: Contributions are tax free, earnings grow tax-free, and funds can be withdrawn tax-free anytime they’re used for qualified health care expenses. The HSA balance carries over and has the potential to grow unlike a “use-it-or-lose-it” FSA. Once employees turn 65, they can withdraw money from an HSA for any purpose – not just medical expenses – without penalty. However, they will have to pay income tax, so they may want to consider reserving it for medical expenses in retirement. Traditional IRA – If employees make after-tax contributions to a traditional IRA, all earnings and growth are tax-deferred. For 2021, the IRA contribution maximum is $6,000 and employees age 50 or older can make an additional $1,000 catch-up contribution. Roth IRA – HCEs may still be eligible to contribute to a Roth IRA, since Roth IRAs have their own separate income limits. But even if an employee’s income is too high to contribute to a Roth IRA, they may be able to convert a Traditional IRA into a Roth IRA via the “backdoor” IRA strategy. To do so, they would make non-deductible contributions to their Traditional IRA, open a Roth IRA, and perform a Roth IRA conversion. This is a more advanced strategy, so for more information, your employees should consult a financial advisor. Taxable Account – A taxable account is a great way to save beyond IRS limits. If employees are maxed out their 401(k) and IRA and want to keep saving, they can invest extra cash in a taxable account. Want to learn more? Betterment can help. Helping HCEs navigate retirement planning can be a challenge. If you’re considering a safe harbor plan or want to explore new ways to enhance retirement savings for all your employees, talk to Betterment today. -
Pros and Cons of OregonSaves for Small Businesses
Pros and Cons of OregonSaves for Small Businesses Answers to frequently asked questions about the OregonSaves retirement program for small businesses. Launched in 2017, OregonSaves was the first state-based retirement savings program in the country. Now, it has more than $100 million in assets. Even the smallest businesses are required to facilitate OregonSaves if they don’t offer an employer-sponsored retirement plan. In fact, the deadline for employers with four or fewer employees is targeted for 2022. If you’re wondering whether OregonSaves is the best choice for your employees, read on for answers to frequently asked questions. 1. Do I have to offer my employees OregonSaves? No. Oregon laws require businesses to offer retirement benefits, but you don’t have to elect OregonSaves. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is OregonSaves? OregonSaves is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, you must automatically enroll your employees into the program. Specifically, the Oregon plan requires employers to automatically enroll employees at a 5% deferral rate with automatic, annual 1% increases until their savings rate reaches 10%. All contributions are invested into a Roth IRA. As an eligible employer, you must facilitate the program, set up the payroll deduction process, and send the contributions to OregonSaves. The first $1,000 of an employee’s contributions will be invested in the OregonSaves Capital Preservation Fund, and savings over $1,000 will be invested in an OregonSaves Target Retirement Fund based on age. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. (They can also opt out of the annual increases.) 3. Why should I consider OregonSaves? OregonSaves is a simple, straightforward way to help your employees save for retirement. Brought to you by Oregon State Treasury, the program is overseen by the Oregon Retirement Savings Board and administered by a program service provider. As an employer, your role is limited and there are no fees to provide OregonSaves to your employees. 4. Are there any downsides to OregonSaves? Yes, there are factors that may may make OregonSaves less appealing than other retirement plans. Here are some important considerations: OregonSaves is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in OregonSaves. For example, single filers with modified adjusted 2021 gross incomes of more than $140,000 would not be eligible to contribute. However, 401(k) plans aren’t subject to the same income restrictions. OregonSaves is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—OregonSaves only allows after-tax (Roth) contributions. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to OregonSaves, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, OregonSaves does not. Limited investment options—OregonSaves offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer OregonSaves; however, employees do pay approximately $1 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of OregonSaves? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you can benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. It’s important to note that the proposed SECURE Act 2.0 may offer even more tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contribution limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with OregonSaves, that means more employee savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What action should I take now? If you decide that OregonSaves is most appropriate for your company, visit the website to register. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
Pros and Cons of Illinois Secure Choice for Small Businesses
Pros and Cons of Illinois Secure Choice for Small Businesses Answers to frequently asked questions about the Illinois Secure Choice retirement program for small businesses. Since it was launched in 2018, the Illinois Secure Choice retirement program has helped thousands of people in Illinois save for their future. If you’re an employer in Illinois, state laws require you to offer Illinois Secure Choice if you: Have 25 or more employees during all four quarters of the previous calendar year Have been in operation for at least two years Do not offer an employer-sponsored retirement plan If your company has recently become eligible for Illinois Secure Choice or you’re wondering whether it’s the best choice for your employees, read on for answers to frequently asked questions. 1. Do I have to offer my employees Illinois Secure Choice? No. Illinois laws require businesses with 25 or more employees to offer retirement benefits, but you don’t have to elect Illinois Secure Choice. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is Illinois Secure Choice? Illinois Secure Choice is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, you must automatically enroll your employees in the program. Specifically, the Illinois plan requires employers to automatically enroll employees at a 5% deferral rate, and contributions are invested in a Roth IRA. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice plan provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. 3. Why should I consider Illinois Secure Choice? Illinois Secure Choice is a simple, straightforward way to help your employees save for retirement. It’s administered by a private-sector financial services firm and sponsored by the State of Illinois. As an employer, your role is limited and there are no fees to offer Illinois Secure Choice. 4. Are there any downsides to Illinois Secure Choice? Yes, there are factors that may make Illinois Secure Choice less appealing than other retirement plans like 401(k) plans. Here are some important considerations: Illinois Secure Choice is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in Illinois Secure Choice. For example, single filers with modified adjusted gross incomes of more than $140,000 in 2021 would not be eligible to contribute. However, 401(k) plans aren’t subject to the same income restrictions. Illinois Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois Secure Choice only allows after-tax (Roth) contributions. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to Illinois Secure Choice, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, Illinois Secure Choice does not. Limited investment options—Illinois Secure Choice offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer Illinois Secure Choice; however, employees do pay approximately $0.75 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of Illinois Secure Choice? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. It’s important to note that the proposed SECURE Act 2.0 may offer even more tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contribution limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employee savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What action should I take now? If you decide that Illinois Secure Choice is most appropriate for your company, visit the website to register. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
A Guide to Safe Harbor 401(k) Plans
A Guide to Safe Harbor 401(k) Plans Stress less by setting up a Safe Harbor 401(k). You can bypass some of the tests and focus on helping your employees save for their financial futures. “Your 401(k) plan failed.” Those words can strike fear in the hearts of even the most seasoned business owners. However, there’s a way to avoid the stress of your plan’s annual nondiscrimination testing. By setting up a safe harbor 401(k), you can bypass some of the tests, such as the ADP and ACP tests, and focus on helping your employees save for their financial futures. But is a safe harbor 401(k) right for your company? Read on for answers to frequently asked questions about safe harbor 401(k) plans. What is nondiscrimination testing? Before we explore safe harbor plans, let’s talk about nondiscrimination tests. Mandated by ERISA, these annual tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. The three main nondiscrimination tests are: Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs). Actual contribution percentage (ADC) test—Compares the average employer contributions received by HCEs and NHCEs. Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. (IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.] Why is it hard for 401(k) plans to pass nondiscrimination testing? It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. So, you may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. If you offer employees a safe harbor 401(k) plan, you can avoid these time-consuming, headache-inducing compliance tests. What is a safe harbor 401(k) plan? So, let’s back up for a minute. What exactly is a safe harbor 401(k) plan? Put simply, it’s a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company. To fulfill safe harbor requirements, you can elect one of the following general contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement. What are the benefits of a safe harbor 401(k) plan? At the end of the day, you want your employees to achieve the retirement they envision—and a safe harbor 401(k) plan can help them pursue it (while saving you time and effort). Consider these top five reasons to elect a safe harbor 401(k) plan: Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. In fact, a Betterment for Business study found that nearly half of respondents said a company match was a factor in whether or not they accepted a new job. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future). Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve your company’s productivity and profitability. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Skip the tests altogether by electing a safe harbor 401(k). Reward your top earners—With a safe harbor 401(k) plan, you can ensure that you and your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing). Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan. An ideal solution for small businesses If you’ve failed nondiscrimination testing in the past—or are concerned that your lower earning employees won’t participate in a 401(k) plan—a safe harbor plan may be the best solution for your small business. Get a safe harbor 401(k) plan that works for you and your employees. Start now. What are the key cost considerations of offering a safe harbor 401(k) plan? The main consideration is that safe harbor contributions could increase your overall payroll by 3% or more depending upon your participation rates and contribution formula. Therefore, it’s important to think about whether your company has the financial capacity to make employer contributions on an annual basis. The good news is that 401(k) plans—including those with safe harbor provisions—are more affordable than they have been in the past. In fact, providers like Betterment now offer comprehensive plan solutions at low costs. Learn more now. How do I set up a safe harbor 401(k) plan? If you’re thinking about setting up a safe harbor plan or adding a safe harbor match to your existing plan, here are a few safe harbor 401(k) rules you need to know: Starting a new plan—For calendar year plans, October 1 is the final deadline for starting a new safe harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts. So, if you’re mulling over a safe harbor plan, be sure to talk to your plan provider well in advance. Adding a safe harbor match to an existing plan—If you want to add a safe harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1. However, employees are required to receive a notice at least 30 days prior. Adding a safe harbor nonelective contribution to an existing plan—Thanks to the SECURE Act, plans that want to become a nonelective safe harbor plan have newfound flexibility. An existing plan can implement a 3% nonelective safe harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective safe harbor contribution of 4% or more have until the end of the following year in which the plan will become a safe harbor. Importantly, the SECURE Act eliminated the usual employee notice requirement for nonelective safe harbor plans. Communicating with employees—Every year, eligible employees need to be notified about their rights and obligations under your safe harbor plan (except for those with nonelective contributions, as noted in the previous bullet). Notice must be given at least 30 days, but no more than 90 days, before the beginning of the plan year. Want to learn more about notices? Visit the IRS website.A plan provider like Betterment will be able to assist you with everything you need to create the safe harbor 401(k) plan that’s right for your company. How do I select a safe harbor 401(k) plan provider? When it comes to choosing the right provider, it’s all about asking the right questions. Here’s how Betterment would answer them: Do you have experience setting up safe harbor 401(k) plans? Our team has significant experience working with safe harbor 401(k) plans. We help you understand each step of the onboarding process so you can start your plan quickly and easily. Plus, we have the expertise you need to handle every detail—from safe harbor 401(k) eligibility rules to investment options. How much does your service cost? Our fees are a fraction of the cost of most providers. Plus, we’re always fully transparent about fees so there are no surprises for you or your employees. How easy will it be for me to administer our plan on an ongoing basis? Our intuitive platform works to reduce your administrative burden. That means you’ll stay informed of what you need to do and when you need to do it—simplifying plan administration. Do you offer financial wellness support for employees? Our high-tech solution enables us to give employees holistic, personalized advice on everything from contribution rates to investments. Plus, we can link employees’ outside investments, savings accounts, IRAs, and spousal/partner assets, so they can get a big picture view of their long- and short-term financial goals. What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year? If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year! Betterment is not a tax advisor. Please consult a qualified tax professional. -
What Employers Should Know About Timing of 401(k) Contributions
What Employers Should Know About Timing of 401(k) Contributions One of the most important aspects of plan administration is making sure money is deposited in a timely manner—to ensure that employer contributions are tax-deductible and employee contributions are in compliance. Timing of employee 401(k) contributions (including loan repayments) When must employee contributions and loan repayments be withheld from payroll? This is a top audit issue for 401(k) plans, and requires a consistent approach by all team members handling payroll submission. If a plan is considered a ‘small plan filer’ (typically under 100 eligible employees), the Department of Labor is more lenient and provides a 7-business day ‘safe harbor’ allowing employee contributions and loan repayments to be submitted within 7 business days of the pay date for which they were deducted. If a plan is larger (>100 eligible employees), the safe harbor does not apply, and the timeliness is based on the earliest date a plan sponsor can reasonably segregate employee contributions from company assets. Historically, plans leaned on the outer bounds of the requirement (by the 15th business day of the month following the date of the deduction effective date), but today with online submissions and funding via ACH, a company would generally be hard-pressed to show that any deposit beyond a few days is considered reasonable. To ensure timely deposits, it’s imperative for plan sponsors to review their internal processes regularly. All relevant team members -- including those who may have to handle the process infrequently due to vacations or otherwise -- understand the 401(k) deposit process completely and have the necessary access. I am a self-employed business owner with income determined after year-end. When must my 401(k) contributions be submitted to be considered timely? If an owner or partner of a company does not receive a W-2 from the business, and determines their self-employment income after year-end, their 401(k) contribution should be made as soon as possible after their net income is determined, but certainly no later than the individual tax filing deadline. Their 401(k) election should be made (electronically or in writing) by the end of the year reflecting a percentage of their net income from self employment. Note that if they elect to make a flat dollar 401(k) contribution, and their net income is expected to exceed that amount, the deposit is due no later than the end of the year. Timing of employer 401(k) contributions We calculate and fund our match / safe harbor contributions every pay period. How quickly must those be deposited? Generally, there’s no timing requirement throughout the year for employer matching or safe harbor contributions. The employer may choose to pre-fund these amounts every pay period, enabling employees to see the value provided throughout the year and to benefit from dollar cost averaging. Note that plans that opt to allocate safe harbor matching contributions every pay period are required to fund this at least quarterly. When do we have to deposit employer contributions for year-end (e.g., true-up match or safe harbor deposits, employer profit sharing)? Employer contributions for the year are due in full by the company tax filing deadline, including any applicable extension. Safe harbor contributions have a mandatory funding deadline of 12 months after the end of the plan year for which they are due; but typically for deductibility purposes, they are deposited even sooner. -
Pros and Cons of CalSavers for Small Businesses
Pros and Cons of CalSavers for Small Businesses Answers to frequently asked questions about the CalSavers Retirement Savings Program The clock is ticking! By state law, businesses with 50 or more employees in California must provide a retirement program to their employees by June 30, 2021. And employers with five or more employees must provide a program by June 30, 2022. If you’re an employer in California, you must offer the CalSavers Retirement Savings Program—or another retirement plan such as a 401(k). Faced with this decision, you may be asking yourself: Which is the best plan for my employees? To help you make an informed decision, we’ve provided answers to frequently asked questions about CalSavers: 1. Do I have to offer my employees CalSavers? No. California laws require businesses with 50 or employees to offer retirement benefits, but you don’t have to elect CalSavers. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is CalSavers? CalSavers is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the CalSavers plan requires employers with at least five employees to automatically enroll employees at a 5% deferral rate with automatic annual increases, up to a maximum of 8%. As an eligible employer, you must withhold the appropriate percentage of employees’ wages and deposit it into the CalSavers Roth IRA on their behalf. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. 3. Why should I consider CalSavers? CalSavers is a simple, straightforward way to help your employees save for retirement. CalSavers is administered by a private-sector financial services firm and overseen by a public board chaired by the State Treasurer. As an employer, your role is limited to uploading employee information to CalSavers and submitting employee contributions via payroll deduction. Plus, there are no fees for employers to offer CalSavers, and employers are not fiduciaries of the program. 4. Are there any downsides to CalSavers? Yes, there are factors that may make CalSavers less appealing than other retirement plans. Here are some important considerations: CalSavers is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in CalSavers. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to CalSavers—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. CalSavers is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—CalSavers only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to CalSavers, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, CalSaver does not. Limited investment options—CalSavers offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer CalSavers; however, employees do pay $0.83-$0.95 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of CalSavers? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with CalSavers, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What if I miss the retirement program mandate deadline? The state will notify you of your company’s non-compliance. Ninety days after the notification, if you still fail to comply, there is a penalty of $250 per eligible employee. If non-compliance extends 180 days or more, there is an additional penalty per eligible employee. As you can imagine, your company could end up paying thousands of dollars in fees for non-compliance! 7. What action should I take now? If you decide that CalSavers is most appropriate for your company, visit the CalSavers website to register before: June 30, 2021 – for businesses with 50+ employees in California June 30, 2022 – for businesses with 5+ employees in California If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
Helping Employees Set Up a Financial Safety Net
Helping Employees Set Up a Financial Safety Net Employers are looking for ways to help their employees save for unexpected financial emergencies. Betterment’s 401(k) platform can help. Your water heater fails. Your car breaks down on the side of the road. Your spouse loses their job because of a global pandemic. Life is filled with challenges, and some are more stressful and expensive than others. As a small business owner, you’ve likely witnessed firsthand how financial emergencies can impact your employees. Not only does the stress affect employees’ personal lives, it can also affect their work performance, attendance, and focus. That’s why an emergency fund —with enough money to cover at least a few months of expenses—is such an important part of your employees’ overall financial plan. However, many people lack this critical safety net. Rainy day funds are running dry According to research by the Employee Benefit Research Institute (EBRI), half of workers say they have a rainy day fund that could cover three months of expenses in the case of sickness, job loss, economic downturn, or another emergency. However, only one in five families actually has liquid savings of more than three months of income. Notably, EBRI found that the lack of an emergency savings fund was not limited to just younger employees or those with lower incomes—it’s an issue that transcends age and income. When faced with an emergency, employees without a financial safety net may turn to credit cards, take a payday loan, or even raid their retirement savings—triggering early withdrawal penalties and derailing their retirement savings progress. Having a solid emergency fund can help prevent employees from spiraling into a difficult financial predicament with wide-reaching implications. Craig Copeland, Senior Research Associate at EBRI, explains, “Given the low percentage of workers and families who have sufficient savings to cover a loss of income for any extended period, emergency savings programs could be directly beneficial to workers and indirectly beneficial to employers through higher employee satisfaction.” In fact, more employers than ever are encouraging their employees to save for unexpected financial emergencies. Emergency fund 101 So, what should your employees consider when setting up an emergency fund? At Betterment, we recommend: Saving at least three to four months of expenses—If employees have a financial safety net, they’ll feel more confident focusing on other important goals like retirement or home ownership. Investing emergency fund money—By investing their money—not socking it away in a low-interest savings account—employees don’t run the risk of losing buying power over time because of inflation. In fact, our current recommended allocation for an emergency fund is 30% stocks and 70% bonds. Making it automatic—Setting up a regular, automatic deposit can help employees stick to their savings plan because it reduces the effort required to set aside money in the first place. With an emergency fund, your employees have the peace of mind of knowing that they have a financial cushion in the case they need it now or in the future. Helping employees save for today—and someday Some employees may feel like they have to choose between building their emergency fund and saving in their workplace retirement plan. But it doesn’t have to be a choice. With the right 401(k) plan provider, your employees can save for retirement and build an emergency fund at the same time. For example, the Betterment platform is “more than just a 401(k) in that it provides: Quick and easy emergency saving fund set-up Betterment makes it easy to establish an emergency savings fund—helping ensure employees don’t need to dip into their 401(k) when faced with unexpected financial difficulties. If your employees aren’t sure how much to save, Betterment can calculate it for them using their gross income, zip code, and research from the American Economic Association and the National Bureau of Economic Research.Betterment will also estimate how much employees need to save to build the emergency fund they want to reach their target amount in their desired time horizon. Using our goals forecaster, employees can model how much they need to save each month to reach their emergency fund goal and view different what-if scenarios that take into account monthly savings, time horizons, and target amounts. Linked accounts for big picture planning Our easy-to-use online platform links employee savings accounts, outside investments, IRAs—even spousal/partner assets—to create a real-time snapshot of their finances, making it easy for them to see the big picture. That means that in a single, holistic view, employees can track both their 401(k) plan account and their emergency fund. Personalized advice to help employees save for today (and someday) By offering personalized advice, Betterment can help your employees make strides toward their long- and short-term financial goals. Our retirement advice and automated tax saving strategies like tax loss harvesting can help them avoid unnecessary taxes and save more for the long term. Ready for a better way to help your employees prepare for the inevitable—and the unexpected? Talk to Betterment today. -
Did Your 401(k) Plan Fail Its Compliance Test?
Did Your 401(k) Plan Fail Its Compliance Test? After another busy 401(k) compliance season, we sat down with Mikang Kim, Senior 401(k) Compliance Manager at Betterment, to get her perspective on plan failures: why they happen, what a plan sponsor can do about them, and how to decrease the likelihood of failing going forward. Compliance Failure Q&A Q: First things first: what exactly is 401(k) compliance testing and when is it performed? Sometimes called “non-discrimination” testing, compliance testing is conducted shortly after the close of a plan year, so roughly mid-January through mid-April for calendar year plans. In short, a 401(k) plan must pass these tests each year to verify that it does not benefit highly compensated employees (HCEs) at the expense of non-highly compensated employees (NHCEs) unfairly. Although there are a number of compliance tests, one of the most important is the “actual deferral percentage,” or ADP, test. Q: What exactly does the ADP test look at? With the ADP test, we compare the average 401(k) deferral percentage for HCEs to the average 401(k) deferral percentage of NHCEs. If the difference is greater than a certain margin (as shown in the table below), the plan is said to have “failed” the ADP test. Average NHCE rate Maximum HCE Average Rate Under 2% 2 x NHCE Rate 2% to 8% 2% + NHCE Rate Over 8% 1.25 x NHCE Rate It’s important to note that the average deferral rate for testing purposes takes into account all eligible employees, including both active and terminated employees for the plan year. As a side note, this might differ from how the average deferral rate is defined for plan health purposes, which usually looks at the average deferral rate only of those participants who are actively contributing. Q: What exactly are the consequences of failing the ADP test? It’s probably scarier than it sounds because it can be fairly easily corrected. There are two ways to correct the failure. One is to refund excess 401(k) contributions to the impacted HCEs. The refund amount is dependent on the size of the failure, but it is taxable to the affected employees (often owners and senior managers) who will likely be unpleasantly surprised by this turn of events. It’s never an easy conversation for the plan administrator to have. The second method is to make a corrective contribution (equal to the failed margin) known as a Qualified Non-elective Contribution (QNEC) to all of the non-highly compensated employees. This may be costly to the employer, but if the failed margin is small and the company is on the smaller side, this may be a good alternative to correct the failure. Generally, this correction needs to be completed by two and a half months after the end of the plan year being tested (March 15 for calendar year plans). Q: OK, before we go any further, let’s make sure everyone is on the same page with respect to the definitions of HCE and NHCE. Ah, and that’s where some of the 401(k) fun comes in because there are actually different ways that these categories of employees can be defined. And the plan sponsor has some flexibility in choosing the definition that may make it easier for the plan to pass compliance testing. But one thing that’s important to know is that you only have to define who falls within the HCE category since NHCEs are just the residual (i.e., everyone else). Compensation is understandably one factor in determining whether someone is an HCE or not. But it’s based on prior year compensation data. So if we’re in February of 2021, doing 2020 compliance testing on a plan, we’d need 2019 compensation data from the plan sponsor. That can cause a lot of confusion at first, especially for plans that just started up. For example, a plan that started in June 2020 will understandably question why they need to provide us with company compensation data —before the 401(k) plan was even in existence. It’s because we need to determine who was an HCE, and that’s based on the prior year, also known as a “lookback year.” Obviously, if the company wasn’t even in existence in the prior year, we would then have to rely on more recent data. And in fact, in such a case, we wouldn’t rely on compensation to define HCEs, but just the ownership definition, which we’ll get into. Q: So it sounds like the next logical question then is: what are the different HCE definitions? Sure. Certain types of employees are automatically defined as HCEs regardless of their compensation. This can be tricky for businesses, especially those that are small and/or family run. An HCE is an employee who meets one of the following criteria: Ownership in Current or Prior Year – regardless of compensation, owns over 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. This includes family members. Prior year compensation exceeds IRS definition of HCE. This is regardless of current year compensation. In 2019, this amount was $125,000. Q: I guess this leads to other methods of defining HCEs and NHCEs. Exactly. Alternatively, larger plans especially may wish to define HCEs using the Top-Paid Group Election (TPG) method that allows them to limit the number of HCEs to their top 20% of employees based on prior year compensation. This must be defined in the plan document and could be beneficial if high earners who aren’t in that top 20% are contributing significantly, which in turn can help boost the average contribution rate of the other 80%. One thing to note is that any employees who are considered highly compensated under the ownership definition will still be treated as HCEs, regardless of compensation. So the exact percentage of HCEs using the TPG method may actually exceed 20%. Q: So what are some factors that contribute to ADP testing failures? One of the most common challenges we see happens when plans start late in the year. Often, HCEs who have more discretionary income are so excited about the plan and the ability to maximize their savings and their tax deferrals. So even with just a few payroll periods left in the year, they maximize their contributions, contribute at much higher rates than NHCEs, and cause the plan to fail. Plans that start late in the year should be aware of this potential problem. If they don’t want to delay starting the plan, they should communicate to HCEs that they will be unlikely to contribute the maximum annual amount (and may risk receiving a taxable refund of contributions after the year ends). Our message to plan administrators, though, is this: if the sole focus for starting a 401k plan is to allow the owner or other HCEs to max out their contributions, be forewarned that your plan may fail the ADP test. Remember that as a fiduciary, you must operate the plan in the interests of all of your employees. Q: Any other things to watch out for? Other plans that may need to be more cautious include small plans, especially where the owner may be the only HCE. If other employees aren’t contributing or contributing enough, that can be difficult. Another wrinkle can occur when there are HCEs who are earning less than the statutory maximum compensation amount. Among other things, this is the maximum amount that can be used when performing the test calculations. Consider an HCE under age 50 who is contributing the maximum annual 401(k) contribution of $19,500. If they are earning the statutory maximum compensation amount of $285,000 for 2020, that is the equivalent of 6.8% of salary. However, if they are earning just $150,000 (which also qualifies them as an HCE), that same $19,500 translates into a 13% contribution rate. So the range of HCE compensation can have a huge impact on that HCE ADP. Q: How can plans ensure that they don’t fail the ADP test? For those who aren’t aware, there’s one very easy solution. The ADP compliance test can be bypassed altogether if the plan adopts a Safe Harbor plan design, which requires a mandatory contribution. Of course, the company needs to weigh the added expense against the benefits of reduced compliance headaches and potentially better funded retirements for their employees. But for plans who are starting late in the year, adopting Safe Harbor is a great way to avoid potential testing failures and having to refund contributions to HCEs. Q: And what if the Safe Harbor plan design is just too costly? Short of adopting a Safe Harbor plan design, there are other things plans can do to reduce the likelihood of failing the test. For instance, implementing automatic enrollment for all employees at a rate that is sufficiently high can go a long way. Most people do not opt-out of the plan or change their default contribution amount. So if the plan contributes everyone at, say 6%, there’s probably a much better chance that the plan will pass ADP testing. In addition, sometimes (but not always) a matching contribution can really motivate employees to save more. For instance, if employees have to contribute 6% to earn the maximum employer contribution, they will be more likely to contribute that amount. Often this requires clear and consistent communication to be sure that employees newly eligible for the plan are also aware of the matching feature and how they can earn the maximum amount. That said, if an employer is willing to take on the expense of a matching contribution, then a Safe Harbor plan design may make more sense since that eliminates the uncertainty associated with compliance testing altogether. Plans may also decide to use the Prior Year testing method, which allows them to limit HCE plan contributions going forward based on the results of the prior year tests. This is not a guarantee that the plan will pass the ADP test, but it reduces the likelihood. Q: What’s your advice to plans that have failed the ADP test? First of all, don’t panic. It’s not uncommon for plans to fail the ADP test. That said, it’s worth analyzing what else is going on with plan design that could be negatively impacting participation or contribution rates. For instance: Is the eligibility requirement restricting from contributing to the plan who otherwise might thereby helping boost NHCE engagement? Is the plan being made available to all employees who are eligible according to the plan document? Unless it’s written in the plan document that part-time and/or seasonal employees such as interns cannot contribute to the plan until they meet certain eligibility requirements (specific to this employee class), they must be given the opportunity to contribute to the plan. Are definitions of plan compensation (excluding pre-participation compensation for instance) skewing the average contribution percentages and impacting testing in unexpected ways? Of course, we caution everyone that testing can change from year to year, especially for new plans or companies just starting out, so it’s not something that’s one and done. New plans who pass their first year should especially guard against getting too complacent in thinking they won’t have any problems in the future. In addition, plans should monitor plan engagement, paying attention not just to the participation rate but the average contribution rate of different employee groups, and continue to communicate the benefits of the plan, particularly to those groups who need to hear it most. Betterment can work with plans to develop a strategy for reaching out to their employees. Q&A was conducted in 2021 and is meant to be educational in nature. -
The Small Business Guide to the 401(k) Match
The Small Business Guide to the 401(k) Match Choosing which benefit packages to offer your employees is a big decision. Let us guide you through the benefits of 401(k)s and matching contributions. There’s no denying that when a company offers its employees meaningful benefits, the company is often more successful at employee retention and employee happiness. According to employee benefits research done by Zenefits, companies that use benefits as a strategic tool for recruiting and retaining talent enjoy better overall company performance and above-average effectiveness in recruitment and retention compared to organizations that don’t. In fact: The majority of participants (51%) said they are “very unlikely” to accept a job that does not offer benefits 28% of respondents said they left a job because of poor benefits packages The key is to choose the right benefits package for your organization. 401(k) plans remain a consistent offering, and helping navigate retirement savings options can be a critical component of your overall benefits package. Financial perks as part of a benefits package Once a business owner determines the type of benefits plan they want to offer (here’s a benefits planning kit to get you started) and finalizes the details of their fiscal benefits, one of the big things to decide is whether to match employee contributions to the 401(k) plan. Determining whether or not you’ll offer a match is a big decision and there are many factors to consider when it comes to how the match is actually offered. While an employer contribution isn’t required by law, it’s a great way to show that you are invested in employees’ financial security. Whether you’re rolling out a retirement plan for the first time or brainstorming ways to upgrade your benefits package, there are the big factors to consider before introducing a 401(k) match, and what you need to know if you decide to offer one. If you’re making the effort and investment to offer a great benefit like a 401(k), research shows your employees are very likely to participate. Participation rates among workers who are offered a 401(k) varies depending on a variety of factors including age and rank. If you’re seeing low participation rates among your employees, offering a match is a great way to encourage enrollment. Should you offer a 401(k) match? Many small businesses think they can’t compete with larger companies, whose deep pockets seemingly afford everything—including a generous profit sharing or 401(k) match program. But in the retirement savings world, this isn’t always the case. Here are some reasons why a match program might be a good idea for your small business: Tax Benefits Employer contributions to employees’ 401(k) accounts are not subject to federal, state, and payroll taxes. Further, employer contributions are tax deductible, up to 25 percent of eligible compensation (and also subject to combined limits with employee contributions). Recruitment and Retention It’s no secret that the best talent expects the best compensation and benefits packages. Many seasoned professionals expect not only a great 401(k), but a plan that includes an employer match. Not offering a match could limit your talent pool and stifle growth. Productivity Happy employees perform better and generate higher profits. Employees are most productive when they aren’t faced with an uncertain financial future. A 401(k) plan makes it easier for employees to save and think long-term, and employer contributions offload some of the pressure to set aside disposable income. Studies show that happy employees are more productive, helping your bottom line. Types of Employer Contributions Businesses have a few options when it comes to offering a match. Here are the major types: For Peace of Mind: Safe Harbor Contributions A Safe Harbor 401(k) is designed to ensure all workers receive fair opportunity to benefit from the plan. A Safe Harbor plan design requires making contributions to an employee’s 401(k) as a percentage of their salary. It’s a costly upfront option, but it alleviates a lot of the pressures involved in compliance testing each year. Safe harbor contribution types include: Basic Match: Contribute 100% of employee 401(k) deferrals up to the first 3% of salary, then 50% of deferrals of the next 2% of each employee’s salary. Enhanced Match: Contribute 100% of employee 401(k) deferrals up to 4% to 6% of their salary. Non-Elective Contribution: Contribute at least 3% of each employee’s salary, regardless of their 401(k) deferral. For Flexibility: Discretionary Matching Contributions With discretionary matching contributions, you decide what percentage of employee 401(k) deferrals to match and what percentage of pay to match up to, with the flexibility of adjusting the matching rate as your business needs change. For example, many plans choose to match 50% of deferrals up to 6% of compensation. Keep in mind that a matching formula will be easy to enhance over time, but difficult to reduce without negatively affecting employee morale. For (More) Flexibility: Nonelective Contributions Each pay period, you have the option of providing a contribution to your employees’ 401(k) accounts based on salary, regardless of their contribution amount. A common type of nonelective contribution is profit sharing, which can either be a percentage of an employee’s salary or a lump sum, typically after year-end. This option is ideal when profits aren’t consistent, but you want to share success with employees when the company does well. Two of the most common profit sharing formulas are: Dollar Amount: For example, you allocate $1,000 to each eligible employee. Pro Rata (Comp to Comp): You allocate a fixed contribution amount among employees based on their relative salaries. It’s important to note that you can always start a 401(k) plan without a matching contribution and decide to add one down the road when it makes sense for your business. Even without a matching contribution, a 401(k) plan can be an effective tool to help your employees save for their future thanks to its beneficial features: Convenient. Employee contributions are made through payroll deduction, providing a built-in discipline that makes it easier to save. Tax-advantaged flexibility. Most plans allow employees to choose between making contributions on a pre-tax or Roth (after-tax) basis. This means employees can choose to defer taxes and reduce their current income or pay taxes now and make tax-free withdrawals of their contributions in the future. High contribution limits and no income limits. Compared to an Individual Retirement Account (IRA), a 401(k) allows individuals to save more than 3 times as much, without regard to income. This article is provided courtesy of Workest by Zenefits, one of Betterment’s partners. Zenefits helps employers stay on top of all HR, benefits, and payroll in a seamless affordable app. Zenefits believes in empowering small businesses, and offers Free Payroll for a year, for any business who needs it. -
Related Companies and Controlled Groups: What this means for 401(k) plans
Related Companies and Controlled Groups: What this means for 401(k) plans When companies are related, how to administer 401(k) plans will depend on the exact relationship between companies and whether or not a controlled group is deemed to exist. Understanding Controlled Groups Under IRS Code sections 414(b) and (c), a controlled group is a group of companies that have shared ownership and, by meeting certain criteria, can combine their employee bases into one 401(k) plan. The controlled group rules were put into place to ensure that the plan provides proper coverage of employees and that it does not discriminate against non-highly compensated employees. Parent-Subsidiary Controlled Group: When one corporation owns at least an 80% interest in another corporation. The 80% ownership threshold is determined either by owning 80% of the total value of the corporation’s shares of stock or by owning enough stock to hold 80% of the voting power. Brother-Sister Controlled Group: When two or more entities are controlled by the same person or group of people, provided that the following criteria are met: Common ownership: Same five or fewer shareholders own at least an 80% controlling interest in each company. Identical ownership: The same five or fewer shareholders have an identical share of ownership among all companies which, in the aggregate, is more than 50%. In this first example below, a brother-sister controlled group exists between Company A and Company B since the three owners together own more than 80% of Companies A and B, and their identical ownership is 75%. Owner Company A Company B Identical Ownership Mike 15% 15% 15% Tory 40% 50% 40% Megan 40% 20% 20% Total 95% 85% 75% In this second example below, a brother-sister controlled group does not exist between Company A and Company B since the identical ownership is only 15%, well below the required 50% threshold. Owner Company A Company B Company C Identical Ownership Jon 100% 15% 15% 15% Sarah 0% 40% 50% 0% Chris 0% 40% 20% 0% Total 100% 95% 85% 15% Combined Controlled Group: More complicated controlled group structures might involve a parent/subsidiary relationship as well as one or more brother/sister relationship. Three or more companies may constitute a combined controlled group if each is a member of a parent-subsidiary group or brother-sister group and one is: A common parent company included in a parent-subsidiary group and Is also included in a brother-sister group of companies. In the below example, we see that Company A and B are in a brother-sister controlled group as the common ownership for both are at least 80% and the identical ownership is greater than 50%. However, since Company B also owns 100% of Company C, there’s a parent-subsidiary controlled group, which results in a combined controlled group situation. Owner Company A Company B Company C Identical Ownership Ariel 80% 85% 80% Company B 100% Controlled groups and 401(k) plans If related companies are determined to be part of a controlled group, then employers of that controlled group are considered a single employer for purposes of 401(k) plan administration. So even if multiple 401(k) plans exist among the employers within a single controlled group, they must meet the requirements as if they were a single-employer for purposes of: Determining eligibility Determining HCEs ADP & ACP testing Coverage testing Top heavy testing Compensation and contribution limits Vesting determination Maximum contribution and benefit limits Given the complexities associated with controlled group rules and how it may impact 401(k) plan administration, we encourage companies that might have questions related to controlled groups to consult with their attorney or tax accountant. -
A Business Owner’s Guide to Employee Financial Wellness
A Business Owner’s Guide to Employee Financial Wellness If employees are stressed about their finances, it can have a negative impact on their work performance and on your company as a whole. Employees Are Looking to You for Help As a business leader, there’s a lot you can do to help. We at Betterment put together this guide, which includes tips on free and affordable benefits, as well as an annual checklist. We hope the guide helps your employees and business stay happy, healthy, and financially secure. -
ESG Investments in 401(k) Plans: The DOL Final Rule
ESG Investments in 401(k) Plans: The DOL Final Rule Final Rule shifts focus to accommodate growing participant interest in ESG investing. As investors show increased interest in environmental, social and governance (ESG) investing, the government has taken notice. In June, 2020, the Department of Labor (DOL) issued a proposed rule focused on the use of ESG options within retirement plans (such as 401(k)s), citing concerns that investment options were being evaluated using non-financial factors. The DOL softened its stance in its Final Rule, “Financial Factors in Selecting Plan Investments,” released on October 30, 2020, by shifting its regulatory focus away from specifically ESG criteria to the use of broadly defined “pecuniary factors,” or financial considerations, and permitting additional flexibility to consider ESG factors in a financial analysis of investment options. So what exactly is the Final Rule and how do Betterment’s socially responsible investing (SRI) portfolio strategies comply with it? Back to Basics: 401(k) Fiduciary Responsibilities As an employer sponsoring your company’s 401(k) retirement plan, you take on important fiduciary responsibilities under ERISA (Employee Retirement Income Security Act of 1974), including a duty of loyalty and a duty of prudence: The duty of loyalty requires plan sponsors act in the best interests of their plan participants at all times. The duty of prudence requires plan sponsors to be knowledgeable about their plan’s investment options and, if they lack investment expertise, to hire and monitor a service provider like Betterment to manage their plan’s investments for them. While plan sponsors cannot fully transfer all of their fiduciary responsibilities to a service provider, Betterment helps with many of these obligations, serving as both a 3(16) administrative fiduciary and a 3(38) investment fiduciary for 401(k) plans. Betterment as a 3(16) administrative fiduciary handles certain day-to-day administrative responsibilities, such as recordkeeping and filing reports. Betterment as a 3(38) investment fiduciary assumes responsibility for selecting, managing and overseeing a plan’s investment options, relieving plan sponsors of their investment fiduciary responsibility. As a 3(38) investment manager, Betterment is directly responsible for ensuring that our investment options comply with the Final Rule. Having an understanding of the Final Rule and Betterment’s compliance with it will help plan sponsors to ensure that Betterment is choosing investments appropriately for their plans. Changes Resulting from the DOL Final Rule Long-standing DOL guidance, called the “investment duties regulation,” previously focused on how an investment fiduciary could satisfy the duty of prudence in selecting and managing investment options available to participants. The Final Rule makes several key changes to the investment duties regulation and goes into effect on January 12, 2021. “Pecuniary” Factors and the Tie-Breaker Test The Final Rule requires that plan fiduciaries evaluate investments based solely on pecuniary factors (financial criteria), which, consistent with past regulation, include time horizon, diversification, risk, and return. The Final Rule’s definition of pecuniary factors provides additional flexibility for fiduciaries to select an investment option (such as an ESG option) if it has a return and risk profile equivalent to or better than alternative options. Investment fiduciaries, like Betterment, can evaluate whether certain factors (such as brand, corporate reputation, or sustainability) would affect the risk return calculus of an investment, and thus constitute pecuniary or financial factors. The Final Rule also allows an investment fiduciary who is unable to make an investment decision on the basis of financial factors alone to include non-financial factors. To rely on this tie-breaker test, the investment fiduciary must document the decision in detail. Acting in Participants' Best Financial Interests The Final Rule sets forth that investment fiduciaries may not prioritize other objectives over the interest that participants and beneficiaries have in returns generated from their retirement investments (i.e. their future retirement income), such as sacrificing return or taking additional risk to promote non-pecuniary goals. In other words, the duty of loyalty requires fiduciaries to act in the best financial interests of participants. In addition, fiduciaries must also consider reasonably available alternatives, but not every possible alternative in the market. Application to Qualified Default Investment Alternatives (QDIAs) Lastly, the Final Rule prohibits an investment alternative from being used as a QDIA if it has investment objectives or strategies that consider one or more non-pecuniary factors. Consequently, plan fiduciaries should be careful when choosing a QDIA investment strategy to ensure that it does not identify non-financial performance metrics (such as ESG) as an investment goal or a principal investment strategy. Betterment’s Investment Options Betterment Core as QDIA As a 3(38) investment fiduciary to 401(k) plans, Betterment uses its core (Core) portfolio strategy as the QDIA. If plan participants do not select an investment strategy to be used for their 401(k) account, all of their contributions will be invested pursuant to the Core portfolio strategy. The Core portfolio strategy is a globally diversified portfolio of low-fee stock and bond Exchange Traded Funds (ETFs) that includes stock investments in developed and emerging markets and bond investments in governments, agencies and corporations around the world. It considers diversification, liquidity, and current and future return as primary performance metrics in line with the DOL’s guidance and takes into account an appropriate level of risk based on the participant’s age and expected retirement age. Notably for purposes of the Final Rule, the Core portfolio strategy does not name ESG factors as investment goals and does not consider ESG factors in the selection of investment funds to include in the portfolio strategy. To learn more, the Betterment Core portfolio strategy white paper describes the Core portfolio’s construction and methodology. That being said, Betterment does provide a broad range of other investment strategies for participants who do not want to invest in the Core portfolio. Betterment evaluates and monitors all investment portfolio strategies available to participants and beneficiaries. Betterment SRI Portfolios Plan participants with a Betterment 401(k) account may elect, if they choose, to invest their contributions in one of Betterment’s Socially Responsible Investing (SRI) Portfolios, which were recently upgraded to include Broad Impact, Climate Impact and Social Impact portfolio strategies. Betterment’s SRI portfolio strategies aim to maintain the diversified, low-fee approach of Betterment’s Core portfolio while increasing investments in companies that meet SRI criteria. Betterment’s three SRI portfolios each have a different focus within the realm of Environmental, Social, and Governance (ESG) investing. Betterment’s Broad Impact portfolio offers increased exposure to companies that rank highly on all ESG criteria equally, while Betterment’s Climate and Social Impact portfolios focus on increasing exposure to companies with positive impact on a specific subset of ESG criteria. In constructing and testing our SRI Portfolios, we evaluated whether the portfolio or selected investment fund is in the best interests of our clients, including plan participants. To satisfy our duty of loyalty and duty of prudence, we consider here the pecuniary metrics of the SRI Portfolios relative to the Betterment Core portfolio, a reasonably available alternative. Betterment SRI Portfolios are Diversified and Low-Cost The Final Rule reiterates that plan fiduciaries must consider diversification and the reasonable expenses of administering the plan. At Betterment, diversification and low-cost are key tenets of our investment philosophy and were applied to the development of the SRI portfolios. We analyzed all liquid ETFs available which aligned with the SRI mandate of each SRI portfolio that could replace components of the Core portfolio strategy without disrupting the diversification or cost of the overall portfolio. You can read more about the ETFs that are included in each of the SRI portfolios in our SRI Portfolios white paper. While funds that meet ESG criteria are often more expensive, we sought to ensure that the SRI portfolios remained consistent with our low-fee mandate and are not meaningfully higher than those of the Betterment Core portfolio. Expense ratios vary depending on the specific asset mix. Compare our portfolio expense ratio ranges: Betterment SRI Portfolios Are Performance Tested Stressing that plan fiduciaries must evaluate investments based on pecuniary factors alone, with the Final Rule the DOL sought to address concerns that a socially responsible investment could lead to lower returns in the long term compared to another similar portfolio. To determine if there were in fact any financial tradeoffs associated with an SRI portfolio strategy relative to the Betterment Core, we examined evidence based on both historical and forward-looking returns. When adjusting for the stock allocation level and Betterment fees, we found that: There were no material performance differences The portfolios were highly correlated overall Over certain time horizons the SRI portfolios actually outperformed the Betterment Core portfolio Our forward-looking analysis does not provide any basis for concluding that, over the long term, there will be a meaningful difference in performance between our SRI and Betterment Core portfolios. You can read about our full methodology and performance testing in our SRI Portfolios white paper. Our findings are consistent with broader testing of sustainable funds by third-party sources. A white paper by the Morgan Stanley Institute for Sustainable Investing summarized the results from a study that analyzed the performance of nearly 11,000 funds from 2004 to 2018 and compared traditional funds to sustainable funds. The primary takeaway of the study revealed that there was no trade-off in performance when comparing sustainable to traditional funds. Summary While the Final Rule does place some limitations on ESG investing within retirement plans, it is flexible enough to permit investment fiduciaries like Betterment to include ESG factors as part of its financial evaluation of an investment option or strategy. Betterment complies with the Final Rule by offering the Betterment Core portfolio strategy as its QDIA and by carefully evaluating the other available portfolio strategies to ensure they do not sacrifice return or take additional risk to promote non-pecuniary goals. Our extensive work to construct diversified low-cost SRI portfolios is in line with the DOL’s guidance, and our historical and forward-looking performance did not provide any basis to conclude that the Betterment SRI portfolios entail a tradeoff returns for sustainability. Because of this measured approach to portfolio construction and performance testing, we are able to offer plan participants the opportunity to invest in SRI portfolios that are in their economic best interest and align with their values. -
Financial Wellness Begins with a Great 401(k) Plan
Financial Wellness Begins with a Great 401(k) Plan Adding a 401(k) plan—or improving the plan you currently offer—can dramatically improve the financial wellness of your workforce. “How will I pay down my debt?” “Will I be able to afford retirement?” “How can I save for my future and put my kid through college?” These are the questions that are keeping your employees up at night. With the pandemic raging—and increasing concerns about health care, job security, and market fluctuations—financial stress is at an all-time high. In fact, the National Endowment for Financial Education® (NEFE), revealed that nearly 9 in 10 Americans say that the pandemic is causing stress on their personal finances. As an employer or a business owner, you may be wondering what you can do to help. Well, the answer is simpler than you may think. Adding a 401(k) plan—or improving the plan you currently offer—can dramatically improve the financial wellness of your workforce. Your employees may be more financially stressed than you might think According to research from Willis Towers Watson, nearly two in five employees live paycheck to paycheck. And it’s not only those at lower income levels who are affected; even highly paid employees struggle financially. Notably, the survey found that: 39% could not come up with $3,000 if an unexpected need arose within the next month 18% making more than $100,000 per year live paycheck to paycheck 70% are saving less for retirement than they think they should 32% have financial problems that negatively affect their lives 64% believe their generation is likely to be much worse off in retirement than that of their parents As you can imagine, this financial stress seeps into every aspect of your employees’ lives—including their productivity, engagement, and wellbeing at work. In fact, according to Willis Towers Watson, 39% of struggling employees said money concerns keep them from doing their best at work, and 49% reported suffering from stress, anxiety, or depression over the last two years. Financial stress can also trigger higher health care costs, more frequent sick days, and other unanticipated—and financially damaging—side effects. What will all this financial stress cost your business? Well, Gallup research shows that U.S. businesses are losing a trillion dollars every year due to voluntary turnover. Plus, the cost of re-hiring and re-training is compounded in smaller businesses because the loss of knowledge, subject matter expertise, and skills can be difficult to manage when there isn’t a deep bench of succession. Financial wellness is within reach—and this is what it looks like If financial stress can damage the fabric of your organization, financial wellness can help repair that damage. The Consumer Financial Protection Bureau defines financial well-being as: Having control over day-to-day, month-to-month finances Having the capacity to absorb a financial shock Being on track to meet financial goals Having the financial freedom to make choices to enjoy life In a practical sense, being financially healthy means spending within one’s means, having a plan for the future, and feeling confident that today’s decisions today will have a positive impact on the future. Employers who take steps to increase employee financial wellness—such as implementing a 401(k) plan—often experience benefits like increased retention and reduced absenteeism. According to an employee survey, 74% of employees say that financial wellness programs are an important workplace benefit and 60% say they’d be more likely to stay at a job if their employer offered financial wellness benefits that help them better manage their finances. The good news is that some 401(k) plans transcend retirement saving to focus on improving overall financial health. The path to financial wellness starts with a great 401(k) plan While employees may have investments outside of work, quite often, their employer-sponsored 401(k) plan serves as their primary long-term savings vehicle. That’s because features like convenient payroll deduction and automatic enrollment make it easy for employees to save for their future. And for those lucky enough to work for organizations that provide employer contributions, employees can be quite motivated to participate. However, according to the Bureau of Labor Statistics, only about half of employees participate in a retirement plan at work—illustrating a great opportunity for more employers to offer a plan (or work to increase participation). However, not all 401(k) plans are created equal. Some do a far better job at improving employee financial wellness than others. When evaluating 401(k) plan providers, consider the following questions: What types of educational tools and resources are offered and how accessible are they? Many 401(k) providers provide a wealth of educational tools and resources—including webinars and online articles—designed to help employees not just save for retirement but address other financial concerns such as budgeting, debt management, and how to manage taxes. Is personalized advice available and part of the overall fee? 401(k) education has advanced beyond traditional, staid group enrollment meetings, and technology can be essential in helping employees engage with the plan. This may even include individualized and comprehensive advice that can help employees make more informed decisions. Does the platform enable employees to see the bigger picture? Does the provider allow employees to sync outside accounts and track financial goals beyond retirement? Platforms that give employees a holistic view of their finances facilitate good saving habits. How do the fees stack up? Expensive (and sometimes hidden) fees can take a bite out of savings—and disrupt employees’ financial future. Affordable and transparent fees are critical to helping employees keep more of their savings working for them. What types of investments are offered and will they appeal to your employees? Plan providers often have unique perspectives on investments, so take the time to understand whether they will appeal to employees and how strategies will help employees reach their goals. Boost plan participation to boost financial wellness Even if your 401(k) plan offers a more robust approach that can help improve employee financial wellness, the critical first step is to get employees to take advantage of the plan. But that’s sometimes easier said than done. If you’ve struggled with participation rates in the past, consider: Giving away “free money”— Employer contributions (matching, safe harbor, or profit sharing) reward your employees and incentivize them to save for their future through your 401(k) plan. Enhancing communication—Whether you want to send an email, host a meeting, or talk to employees individually, get the word out about the benefits of your 401(k) plan and the full scope of available features. Targeted communication may help employees get started on the road to financial security. Revamping plan features—Consider shortening (or removing) the waiting period so employees can enroll as soon as they’re hired, accelerating the employer contribution vesting schedule, or enhancing the automatic enrollment features by increasing the default contribution rate or expanding the employees impacted. Reap the rewards of a financially well workforce Adding a 401(k) plan or improving your existing one can have a dramatic impact on the financial health of your workforce. Benefits include: Lower levels of employee financial stress Happier employees Less employee turnover Improved productivity Potentially lower healthcare costs Better business outcomes Betterment can help At Betterment, our mission is simple: to empower people to do what’s best for their money so they can live better. Our easy-to-use 401(k) platform ensures that employees can get personalized advice on their saving goals—in one place. From saving for a new house to planning for retirement, employees get the support they need to achieve their goals. Plus, our innovative technology: Takes into account employee ages, savings, and goals to create a personalized plan to help them save for the future they want Enables employees to link their outside assets, making it easy for them to see the full picture of their personal finances -
What to Consider When Choosing a 401(k) Plan Recordkeeper
What to Consider When Choosing a 401(k) Plan Recordkeeper Selecting the right recordkeeper is important to the success of your 401(k) plan. A service provider who understands 401(k) plan administrative requirements and operational compliance can save you time, worry, and money. When you combine quality service with thoughtful plan design, appropriate investment options, and effective employee communications, you can drive strong savings behavior and increase the chances for a financially secure retirement for you and your employees. Prudently selecting a provider to help administer your plan and safeguard your employees’ retirement savings is also part of your fiduciary responsibility as the plan sponsor. Under ERISA, every plan must have at least one “named fiduciary.” The employer is typically the named fiduciary with overall responsibility for the plan. The plan must also designate an ERISA 3(16) plan administrator. This fiduciary has discretion over how the plan is operated and is often responsible for hiring service providers to help administer the plan and ensure that plan notices and disclosures are properly delivered. Most plan documents also name the employer as the ERISA plan administrator. As a fiduciary, you must adhere to high fiduciary standards in carrying out your responsibilities. This includes acting in the best interests of your participants and making sure only reasonable and necessary fees are paid from plan assets. Fortunately, there are skilled recordkeepers and other service providers to help you administer your 401(k) plan and meet your fiduciary responsibilities. 401(k) Plan Services and Who Provides Them So how do you find the 401(k) plan recordkeeper that’s right for you? One of the first steps is to understand what type of services you need and who provides them. A successful 401(k) plan typically requires four types of services: Plan recordkeeping and administrative support Participant services (account access and education) Operational compliance support (plan documents and nondiscrimination testing) Investment selection and monitoring Traditionally, different types of providers offered different types of services for 401(k) plans. Here are general definitions of 401(k) plan service providers: Recordkeeper – A recordkeeper is the bookkeeper for the day-to-day activities of the plan. This includes tracking participant activity such as deferral elections and investment allocations. A recordkeeper also tracks employer contributions and investment gains and losses. Most recordkeepers provide access to a platform of investments that can be selected by the plan fiduciary and made available to plan participants. Providing an easy-to-use and engaging website for participants and employers to access information and transact plan business is a critical element of recordkeeping services. A recordkeeper generally does not assume fiduciary responsibility for the plan but takes direction from the employer sponsoring the plan. Third Party Administrator (TPA) – A TPA provides compliance support to the employer and helps ensure the plan operates in accordance with the rules. This can include drafting and amending plan documents, conducting nondiscrimination testing, and filing an annual Form 5500 on behalf of the plan. In some cases, the role of the TPA and the recordkeeper may be filled by the same entity. Some TPAs also offer investment support services and may derive a portion of their revenue from the sale of investments. Most TPAs perform their administrative services at the direction of the employer and are not considered fiduciaries. However, some TPAs take on the role of the ERISA 3(16) plan fiduciary relieving employers from the fiduciary responsibility for certain plan operations. Trustee – 401(k) plan assets must be held in a trust for the benefit of each participant (unless the assets consist only of insurance contracts). A trustee is typically named in the plan document or a trust agreement. Some employers choose to serve as the plan’s trustee, referred to as a self-trusteed plan. In other cases, a separate entity such as a trust company will be appointed to assume legal title to the plan assets and to provide annual trust or account statements. All trustees are considered to be plan fiduciaries and are subject to strict standards when handling the assets of 401(k) plan participants. Financial Advisor – A financial advisor typically serves as an employer’s investment expert. The financial advisor may also help employers identify their objectives for sponsoring a retirement plan and then help determine the types of services and service model that will meet those objectives. Financial advisors are also typically involved in employee enrollment meetings and providing additional employee education. Those who advise on investments may take on a fiduciary role, serving as either an ERISA 3(21) investment advisor (makes recommendations) or an ERISA 3(38) investment manager (has discretion to select investments for the plan). To Bundle or Unbundle? In today’s market, one entity may fill more than one service provider role for a retirement plan. There are multiple combinations of services possible, depending on the provider and their affiliates. For example, a recordkeeper may also serve as the TPA, or an investment provider may provide recordkeeping services. Some service providers coordinate their services to present a comprehensive solution, known as a bundled service model. For example, a single entity may design a product that includes all facets of retirement plan services – fiduciary investment support, plan documents, recordkeeping, and compliance support. Or a service provider may choose to bundle just a few services such as the recordkeeping and TPA functions. Other providers specialize in just one area of 401(k) plan servicing and don’t affiliate with any other providers. With these types of unbundled providers, the employer is responsible for selecting and engaging independently with each provider and monitoring their performance. A Prudent Process Looking for a 401(k) plan recordkeeper or considering whether you want to change recordkeepers is a fiduciary function, so it’s important to follow a careful process and document your decisions. Consider whether you can manage a group of independent service providers or would benefit from a bundled service model. You may want to start by reviewing a provider’s service agreement to identify the specific services that will be provided, including whether the provider is assuming a fiduciary role as part of those services. Compare multiple providers’ services and fees, so you understand what fees are reasonable in the industry for your plan size and the types of services and features that are most important to you and your participants. Here is a list of elements you may want to consider when evaluating service providers: Types of Services Offered Scope of recordkeeping and administration support Compliance support such as plan documents and nondiscrimination testing Investment advise or support – at the plan level and the participant level Fiduciary services (ERISA 3(16) plan administration, ERISA 3(21) investment advice, or ERISA 3(38) investment management) Employee education programs or employee communication support Online account access and phone/email support services Fees Costs for plan services and investments Transparency of fees Payment structure (e.g., can fees be paid by the business or debited from participant accounts? Are fees paid through a revenue sharing arrangement?) Qualifications of Provider The depth of technical expertise within the organization Experience with plans having similar characteristics Service levels promised, such as turnaround times for common transactions The investment approach or philosophy The sophistication of technology and online tools Referrals or recommendations from other clients Ready for a Better 401(k)? Betterment for Business offers a bundled approach to servicing 401(k) plans, so you don’t need to navigate through multiple providers’ service models and fee structures or worry about gaps in services. We specialize in servicing small businesses for low cost to save you money. And our digital platform makes it easy for you to set up and maintain a 401(k) plan and for your employees to access their account balances and investments. We’re committed to being here for you every step of the way with expert investment and administrative support, including fiduciary 3(16) and 3(38) services. -
SECURE Act: Eligibility Requirement Changes for Part-Timers
SECURE Act: Eligibility Requirement Changes for Part-Timers The SECURE Act of 2019 seeks to expand retirement plan coverage for U.S. workers. One of the Act’s provisions changes 401(k) eligibility requirements for part-time employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 seeks to expand retirement plan coverage for U.S. workers. One of the Act’s provisions changes 401(k) eligibility requirements for part-time employees. IRS Notice 2020-68 provides additional guidance around this rule, including vesting considerations for part-time employees impacted by it. New Eligibility Rule for Elective Deferrals Under the soon to be ‘old’ law, employees that did not meet the maximum statutory requirement (age 21 AND 1,000 hours in a 12-month period) could be excluded from participating in a 401(k) Plan. However, effective with plan years beginning after December 31, 2020, the SECURE Act requires that long-term, part-time, non-union employees must be permitted to make elective 401(k) deferrals after three consecutive 12-month periods with at least 500 hours of service. This rule only applies if the employee is at least 21 years of age at the end of the three consecutive 12-month periods. Important to note: Any service performed prior to January 1, 2021 is not taken into account for purposes of the new eligibility rule for participating in the elective deferral portion of the 401(k) plan. Therefore, the earliest date a long-term, part-time employee can enter the plan to make an elective deferral under the new law is January 1, 2024. Employees who become eligible for the elective deferral portion of the plan solely under the new rule may still be excluded for other types of contributions made to the 401(k) plan (e.g., employer matching contributions, nonelective contributions) until they meet the plan’s eligibility requirements for such contributions. This new rule does not apply to union employees. For purposes of nondiscrimination testing, the employer can still exclude any long-term part-time employee who becomes eligible for the deferral portion of the plan until the employee meets the plan’s eligibility requirements for testing. Special Vesting Rule The eligibility rules relating to employer contributions have not changed, so employers will not be required to make employer contributions for these long-term part-time employees. However, if an employer does voluntarily make employer contributions for long-term part-time employees, and such contributions are subject to a vesting schedule, a special vesting rule must be applied with respect to these employees. Under the new special vesting rule, and for purposes of vesting of employer contributions, a long-term part-time employee must be credited with a year of service ALL 12-month periods during which the employee had at least 500 hours of service. This represents a change for many plans that include a 1,000 hour requirement for their vesting schedule. The notice also clarifies that this special vesting rule applies only to those long-term part-time employees who become eligible to participate in a plan solely on account of this new rule. Finally, this special vesting rule will continue to apply to a long-term, part-time employee even if such employee subsequently becomes a “full-time” employee. In the Notice, the IRS confirmed that all years of service, even those beginning before January 1, 2021, will count under the special vesting rules, unless the plan is subject to certain exceptions (e.g., a plan may provide that years of service before an employee attains age 18 are excluded). Example: Assume Employee X is age 21 and completes 550 hours of service during each 12-month period from January 1, 2016 to December 31, 2023. Employee X becomes eligible to make elective deferrals under her employer’s 401(k) plan in 2024 because she has completed at least 500 hours of service in each of the three consecutive 12-month periods beginning on January 1, 2021. Later in 2024, Employee X becomes a full-time employee, and she then becomes eligible for matching contributions on January 1, 2025. Employee X’s years of service prior to 2021 must be taken into account for purposes of determining her vested interest in any matching contributions made on her behalf. Accordingly, as of January 1, 2025, Employee X would be credited with 9 years of vesting service (not 4 years). What Does This Mean for You? To comply with these new rules, plans that currently require part-time employees to complete a 12-month period with at least 1,000 hours of service to be eligible to make elective deferrals should diligently track service with respect to periods beginning on or after January 1, 2021. In addition, plans that include a vesting schedule for employer contributions should begin assessing their ability to retrieve hours data to determine vesting service for periods beginning before January 1, 2021. -
How Does a Multiple Employer Plan Compare to a Single Employer 401(k) Plan?
How Does a Multiple Employer Plan Compare to a Single Employer 401(k) Plan? Are MEPs and PEPs the new solution for workplace retirement savings or should I pick my own 401(k) plan? Multiple employer plans (MEPs) have been around for many years, but the rules governing these types of retirement plans limit their availability to many employers. In an effort to help more small and mid-sized companies offer retirement savings plans to their employees, the SECURE Act ushered in new changes so that, beginning in 2021, any business can join a new type of MEP, called a Pooled Employer Plan (PEP). Because of this new development, MEPs and PEPs have become buzzwords in the industry and no doubt you’ll see advertisements touting the benefits of these one-size-fits-all type plans. But are they really the magic bullet policymakers are hoping will solve the “retirement savings crisis”? That remains to be determined, but for many employers, sponsoring their own 401(k) plan with the right plan provider is the best way to ensure their goals for a retirement savings plan are met. What is a MEP? A multiple employer plan or MEP is a retirement plan, often structured as a 401(k) plan, that is established and administered by an “MEP organizer.” The MEP organizer makes the plan available to many different employers. If the MEP meets certain requirements set forth in the tax laws and ERISA (Employee Retirement Income Security Act), it will be treated as a single plan managed by the organizer and not as a series of separate plans administered by each participating employer. The MEP organizer serves as plan fiduciary and typically assumes both administrative and investment management responsibilities for all employers participating in the MEP. An MEP is viewed by the Department of Labor (DOL) as a single plan eligible to file one Form 5500 only if the employers participating in the MEP are part of the same trade or association or are located in the same geographical area. There must be some commonality between the participating employers besides just participating in the MEP. A Professional Employer Organization (PEO) may also sponsor an MEP for its employer clients. What is a PEP? The rules limiting the benefits of an MEP to employers with commonality limited the usefulness of MEPs for many small businesses. To allow broader participation in MEPs, the SECURE Act added a new type of MEP, called a Pooled Employer Plan or PEP, effective for plan years beginning in 2021. A PEP is a 401(k) plan that will operate much like a MEP with a plan organizer and multiple participating employers, but there are a few important differences. Any employer can join a PEP; the businesses do not have to have any common link for the PEP to be considered a single plan. But the PEP must be sponsored by a “Pooled Plan Provider” (PPP) that has registered with the DOL and IRS. The Pooled Plan Provider must be designated in the PEP plan document as the named fiduciary and the ERISA 3(16) plan administrator. This service provider is also responsible for ensuring the PEP meets the requirements of ERISA and the tax code, including ensuring participant disclosures are provided and nondiscrimination testing is performed. The PPP must also obtain a fidelity bond and ensure that any other entities acting as fiduciary to the PEP are bonded. What are the benefits of participating in a MEP or PEP? Studies have shown small businesses may refrain from adopting a retirement plan for their employees because of the administrative burdens, fiduciary liability, and cost associated with workplace plans. MEPs have been identified in recent years as a way to address these concerns for employers and potentially increase access to workplace retirement plans for employees of small and mid-size businesses. The MEP structure can alleviate much of the administrative and fiduciary burdens for participating employers, and potentially reduce costs. Reduced fiduciary responsibility – The MEP organizer or the PPP takes on fiduciary responsibility for managing the plan and for selecting and monitoring service providers. This generally includes selecting investments that will be offered in the plan. Reduced administrative responsibility – The MEP organizer or the PPP is responsible for day-to-day administration and complying with all applicable rules and regulations for plan operations. Investment pricing – A MEP/PEP arrangement pools plan assets of all participating employers, which may allow the MEP/PEP to obtain better pricing on investments. Reduced plan expenses – MEPs/PEPs allow small businesses to benefit from economies of scale by sharing the expenses for plan documents, general plan administration, and one Form 5500. Because of these benefits, interest in MEPs has grown over the years, leading to the rule changes that open the MEP opportunity to all employers through a PEP. How do MEPs & PEPs Differ from a Single 401(k) Plan? Many of the responsibilities associated with managing a retirement plan that can challenge plan sponsors are taken on by the MEP organizer or the PPP. This third party is responsible for making almost all the decisions related to managing the plan, hiring and monitoring service providers, and overseeing the plan’s investments and operations. The MEP/PEP entity must perform these services on behalf of all participating employers and will be held to the high fiduciary standards of ERISA for these duties. Once the employer has prudently selected the MEP/PEP entity, the employer is relieved of the day-to-day operational oversight and investment management. However, this transfer of responsibilities also means a transfer of control over key decisions regarding the plan. Conversely, when an employer establishes its own 401(k) plan for its employees, the employer retains many of these operational and investment responsibilities, which the employer typically fulfills with the support of service providers. The employer can design the plan based solely on their goals and objectives for the plan and their employees’ needs. The flexibility retained by an employer adopting a single 401(k) plan includes: Selecting the plan design features that fit their employees’ needs Picking the service provider that will assist them in operating the plan and provide relevant education and guidance to their employees Choosing the menu of investments that will be offered to participants in the plan or engaging an investment advisor to manage or guide investment selection Deciding whether to offer personalized advice to employees When Might a Single 401(k) Plan Might Be Better? While the shared expenses and reduced responsibilities of participating in a MEP/PEP can be attractive to small and midsize employers, sometimes what one employer sees as a benefit, another employer sees as a disadvantage. For example, because the MEP/PEP entity is operating one plan for many employers, the plan may be designed with the features that will be most widely accepted by most employers. There is typically little customization available in order to keep plan operations efficient (and cost effective) for the MEP/PEP entity. Participating employers generally have no control over service providers, plan design, or the participant experience. Additionally, although the structure of a MEP/PEP is meant to reduce administrative and investment expenses for participating employers, it remains to be seen if the cost of these plans will be competitive with the low-cost 401(k) plans available today without compromising on the quality and breadth of services. PEPs will open up the multiple employer plan market to all employers for the first time ever. And there are many financial organizations and service providers preparing to capitalize on this new solution by launching PEP products right away in 2021. But truth be told, the industry is still awaiting guidance from the IRS and DOL on a number of critical elements necessary for building the PEP plan product, including plan documents, acceptable compensation arrangements for service and investment providers, administrative responsibilities for PPPs, and special Form 5500 rules. With so many unknowns yet in the PEP market, it’s difficult to predict whether this new type of multiple employer plan will hit the mark for small business owners. Employers can benefit from the simplicity of a single service provider solution and receive professional fiduciary and administrative support right now with a 401(k) solution designed specifically for small and midsized plans. Ready for the right 401(k) solution? Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Let us help you deliver a 401(k) plan that works for your organization and your employees. -
The Importance and Benefits of Offering Employer Match
The Importance and Benefits of Offering Employer Match Some employees resist saving because they feel retirement is too far away, can’t afford it, or can’t grasp the benefit. You can help change that mentality by offering a 401(k) employer match. Beyond being an attractive employee benefit, a 401(k) plan can act as a catalyst for employees at all career stages to save for retirement. Some employees, however, will resist saving because they feel retirement is too far away, or can’t afford it, or can’t grasp the benefit to making room in their budget (and current spending levels). However, as a 401(k) plan sponsor, you can help change that mentality by offering a 401(k) employer matching contribution. What is a 401(k) employer matching contribution? With an employer match, a portion or all of an employee’s 401(k) plan contribution will be “matched” by the employer. Common matching formulas include: Dollar-for-Dollar Match: Carla works for ABC Company, which runs payroll on a semi-monthly basis (two times a month = 24 pay periods a year). Her gross pay every period is $2,000. She has decided to defer 4% of her pre-tax pay every pay period, or $80 (4% x $2,000). The ABC Company 401(k) plan generously offers a dollar-for-dollar match up to 4% of compensation deferred. With each payroll, $80 of Carla’s pay goes to her 401(k) account on a pre-tax basis, and ABC Company also makes an $80 matching contribution to Carla’s 401(k) account. At a 4% contribution rate, Carla is maximizing the employer contribution amount. If she reduces her contribution to 3%, her company matching contribution would also drop to 3%; but if she increases her contribution to 6%, the formula dictates that her employer would only contribute 4%. Partial Match (simple): Let’s take the same scenario as above, but ABC Company 401(k) plan matches 50% on the first 6% of compensation deferred. This means that it will match half of the 401(k) contributions. If Carla contributes $80 to the 401(k) plan, ABC Company will contribute $40 on top of her contribution as the match. Tiered Match: By applying different percentages to multiple tiers, employers can encourage employees to contribute to the plan while controlling their costs. For example, ABC Company could match 100% of deferrals up to 3% of compensation and 50% on the next 3% of deferrals. Carla contributes 4% of her pay of $2,000, which is $80 per pay period. Based on their formula, ABC Company will match her dollar-for-dollar on 3% of her contribution ($60 = 3% x $2,000), and 50 cents on the dollar on the last 1% of her contribution for a total matching contribution of $70 or 3.5%. The plan’s matching formula is chosen by the company and specified in the plan document or may be defined as discretionary, in which case the employer may determine not only whether or not to make a matching contribution in any given year, but also what formula to use. Is there a limit to how much an employer can match? The IRS limits annual 401(k) contributions, and these limits change from year to year. For 2020, employee contributions are limited to $19,500 (or $26,000 if you’re 50 or over). While employer contributions do not count towards these employee contribution limits, there is a limit for employee and employer contributions combined to the lesser of 100% of an employee’s gross compensation or $57,000 ($63,000 if you are 50 or over). It’s also important to note that the IRS caps annual compensation that’s eligible to be matched. Potential Benefits of Providing an Employer Match Attract talent: Offering a 401(k) is a great way to set your company apart from the competition, and a matching contribution sweetens the deal! A recent Betterment for Business study found that more than 45 percent of respondents considered a 401(k) match to be a factor when deciding whether to accept a job. Better 401(k) plan participation: Unlike other types of employer contributions, a matching contribution requires employees to contribute their own money to the plan. In other words, the existence of the match drives plan participation up (not contributing is like leaving money on the table), encouraging employee engagement and increasing the likelihood of having your plan pass certain compliance tests. Financial well-being of employees: A matching contribution shows employees that you care about their financial well-being and are willing to make an investment in their future. The additional funds can help employees reach their retirement savings goal. Reduced hidden costs: When evaluating the cost of an employer match, it is important to weigh long-term, less immediate benefits for the company. Without a matching contribution, employees may have to work longer than they otherwise would, which can lead to higher costs in the form of higher healthcare expenses, lower productivity and increased absenteeism, not to mention fewer promotional opportunities for other employees. Improved retention: The match is essentially “free money” that can be considered part of an employee’s compensation, which can be hard to give up. And by applying a vesting schedule to the employer match, you can incentivize employees to stay longer with your company to gain the full benefits of the 401(k) plan. Employer tax deduction: matching contributions are tax deductible, which means you can deduct them from your company’s income so long as they don’t exceed IRS limits. In addition to the combined employee and employer contribution limits mentioned above, there is an additional employer contribution limit which in 2020 was 25% of an employee’s compensation (eligible compensation is limited to $285,000 per participant). Offering a 401(k) plan is already a huge step forward in helping your employees save for their retirement. Providing a 401(k) matching contribution enhances that benefit for both your employees and your organization. Ready for a better 401(k) solution? Whether you’re considering a matching contribution or not, Betterment for Business is here to help. We offer a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
How Do State-Based Plans Stack Up Against 401(k) Plans?
How Do State-Based Plans Stack Up Against 401(k) Plans? State-mandated retirement plans increase worker access to workplace savings programs, but they may not be the best fit for employees or employers. The most important thing you can do to help your employees prepare for retirement is to offer a workplace savings plan. A recent study from the Employee Retirement Benefit Institute (EBRI) shows that workers who have access to a retirement plan at work are far more likely to save for retirement: 79% of those with access to a plan have retirement savings vs. only 17% of those without access to a plan. Increasing access to a workplace savings plan is an important policy goal in the U.S. Helping more workers save for a financially secure retirement will reduce reliance on government programs for retirees. Policymakers continue to explore new solutions for increasing workers’ access to retirement plans, including incentivizing employers to sponsor a workplace plan, like a 401(k) plan. State governments are also coming up with various strategies to increase workers’ access to workplace savings programs, including requiring employers to participate in a savings plan designed and administered by the state. Since 2012, Georgetown University’s Center for Retirement Initiatives shows that 45 states have taken action to promote access to workplace savings plans, ranging from studying plan options to passing legislation to enrolling employers into a plan. State plans As of September 2020, a dozen states and one city government have passed legislation to help or require employers to offer a savings plan at work in one of the following ways: Voluntary participation in a Payroll Deduction IRA: New York and New Mexico Mandated participation in a Payroll Deduction IRA (if not offering another retirement plan): California, Colorado, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Seattle WA Voluntary participation in a multiple employer defined contribution plan: Massachusetts and Vermont Voluntary use of products from a state-based retirement plan marketplace: Washington and New Mexico The most popular option: Payroll Deduction IRA Plans Of the states that have passed legislation to establish a state-based plan, the majority have chosen to require employers to participate in a Payroll Deduction IRA program, also known as an “Auto IRA” plan. Generally, under an Auto IRA plan, employers who do not offer a retirement plan (for example, a 401(k) plan) must automatically enroll their employees into a state IRA savings program. The employer withholds a certain percentage of an employee’s wages and deposits it into a Roth IRA on behalf of the employee. Employees have control over their individual Roth IRA and can opt out of participating. These programs do not allow employers to supplement employee deferrals with matching or other types of employer contributions. The state administers the Roth IRAs and oversees the investment options. The details of each program vary by state. For example, The OregonSaves program requires any employer that does not offer a qualified retirement plan to enroll employees at a 5% deferral rate, which must be increased by 1% each year up to a maximum of 10%. The Illinois Secure Choice plan requires employers who have been in business for at least two years and have at least 25 employees to automatically enroll employees at a 5% deferral rate. The CalSavers plan requires employers with at least 5 employees to automatically enroll employees at a 5% deferral rate with automatic annual increases up to a maximum of 8%. Pros & Cons of state-based plans States are increasing access to retirement plans by requiring most employers to offer the state-based plan if they don’t offer another type of retirement plan. The automatic enrollment feature encourages savings among workers who otherwise might not take the initiative to do so. And automatic payroll deduction makes disciplined saving easy and convenient for employees. While employers are being forced into these arrangements, there are little to no costs for the employer and few administrative burdens other than processing the payroll withholding and depositing employees’ money into the IRAs. There are, however, some less-than-ideal aspects of state-based plans that should be considered. These plans are not subject to the worker protections under ERISA that apply to other tax-qualified retirement savings plans, such as 401(k) plans. ERISA is a federal law that requires fiduciary oversight of retirement plans and provides some uniformity to plan operations nationwide. Each state-based plan has its own rules and features, which can make it more difficult for employees and employers living and working in different states to comply. Another concern is that workers do not receive a tax benefit for their savings in the year they make contributions because most state-based plans (so far) consist of after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until removed from the IRA and may eventually be tax-free. IRAs also have much lower contribution limits than other types of retirement plans. A worker may save up to $6,000 in an IRA in 2020 ($7,000 if they’re age 50 or older), while a worker may save up to $19,500 in a 401(k) plan in 2020 ($26,000 if they’re age 50 or older) and may be eligible for additional employer matching and/or profit sharing contributions. Pros & Cons of 401(k) Plans For many employers – even very small businesses – a 401(k) plan may be a more attractive option than a state-based plan for a variety of reasons. Employer benefits Flexibility and control over plan service providers, investments, and plan features to meet your company’s needs and objectives Tax credit for plan start-up costs for small businesses Tax deduction for plan expenses paid by business owner Option to make tax-deductible contributions to your employees’ accounts Ability as a business owner to save for your own retirement Employee benefits Disciplined savings through automatic payroll deduction Reduced taxable income through pre-tax salary contributions & greater flexibility with respect to timing of taxes, with option to make Roth contributions Tax credits for lower paid employees Higher contribution limits than permitted in most state-based savings arrangements (For 2020, employee and employer contributions can reach 100% of an employee’s income up to $57,000 for employees under age 50 and $63,500 for employees age 50 and older, including business owners) Access to a broad range of investment options and often additional resources, including managed accounts and/or personalized advice Tax-deferred growth on investments while in the 401(k) plan Option to take a loan from retirement savings Benefits of 401(k) Plan vs Payroll Deduction Roth IRA 401(k) Payroll Deduction Roth IRA Employer contributions allowed x Plan design flexibility x Choice of provider x Small business tax credits x Tax deductions for employer contributions x Employee contribution limits (2020) $19,500 under age 50 $26,000 age 50+ $6,000 under age 50 $7,000 age 50+ Combined employee and employer contribution limits (2020) Up to 100% of employee’s income (max $57,000 for employees under age 50 and $63,500 for employees age 50+ and older, including business owners No employer contributions Ability for employees to save on pre-tax basis and reduce current tax liability x Flexibility with respect to employee tax liability x Additional potential plan features Personalized advice, employer contributions, loans, hardship distributions ERISA Protection from creditors x Of course, with all these benefits for the employer and employees come some administrative requirements to ensure the tax laws are met. Employers sponsoring a 401(k) plan are also required by ERISA to act solely in the interest of their employees and ensure that they and any others who have discretionary control over the plan or its assets meet the high standards of a fiduciary. Engaging plan providers for document, recordkeeping, and investment support is an added expense for employers. With the right 401(k) solution, however, employers can offer a robust retirement plan benefit that fits the company’s objectives and employees’ needs, as well as receive expert assistance, while also controlling costs. Ready for the right 401(k) solution? Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
Employee Retention Strategies to Prevent High Turnover
Employee Retention Strategies to Prevent High Turnover Employees are the lifeblood of our economy—and retaining top talent is, in many cases, more important than ever. The COVID-19 pandemic has tested businesses in unimaginable ways. Millions of employees are working from home. Companies are shifting gears to make personal protective equipment. Many small businesses and mega corporations have had to close temporarily or even permanently. While the situation continues to evolve, one fact remains: Employees are the lifeblood of our economy—and retaining top talent is, in many cases, more important than ever. In any economy, retention matters U.S. businesses lose a trillion dollars every year due to voluntary turnover. Beyond the financial impact, high turnover can also damage employee morale, negatively affect your relationships with customers, and even shake the foundation of your business. But if team members really want to leave, there’s nothing you can do, right? Not quite. In fact, 52% of employees voluntarily exiting say their organization could have done something to prevent them from leaving. Fact: Gallup estimates that the cost to replace an employee can range from one half to two times the employee’s salary. How does your turnover rate compare? According to PayScale, the Fortune 500 company with the highest average employee tenure is the Eastman Kodak Company, which clocks in at 20 years! However, a few employers at the bottom of the list have an average employee tenure of one year or less—namely, Massachusetts Mutual Life Insurance Company, American Family Life Assurance Company of Columbus (AFLAC), and Amazon.com Inc. Why? Well, a mix of factors contribute to their high turnover including working conditions, pay scales, and industry competition. So, what are the most effective employee retention strategies? While there’s no one “right” way to improve employee retention, we’ve provided 20 suggestions that can boost your employee retention rate, engagement, and morale. 1. Hire right the first time—If you want to retain top talent, start by hiring the right employees. During the interview process, don’t just focus on potential new employees’ educational background and list of talents. Listen closely to how they answer questions and what their references have to say about them. Skills can be acquired through training, but qualities like a positive attitude or sense of loyalty are not easily taught. 2. Be up-front about the tough stuff—Does the job require 75% travel? Or repetitive data entry? Be sure you and your human resources team are upfront about the nitty-gritty job details—including those that potential employees may not love. That way, they will know exactly what they’re getting into before they accept the position. 3. Pay fairly—When it comes to retention, it almost goes without saying that money matters (a lot). Utilize salary benchmarking services or check out websites like glassdoor.com to get an idea of what is considered competitive compensation for each role. Also consider financial incentives like performance bonuses, promotions, pay raises, 401(k) matching contributions, and stock options. Provide awesome benefits—Beyond pay, benefits like an excellent 401(k) plan, a strong health insurance plan, and generous time off can go a long way toward improving job satisfaction and boosting your employee retention. Want to upgrade your benefits? Consider footing a greater share of insurance costs, offer a 401(k) matching contribution, or provide more flexibility around time off (up to and including making it unlimited!). Want to learn more? Read our article on competitive compensation. Show them the money in black and white Many top-performing companies provide total compensation statements to their employees. So, what’s a total compensation statement? Well, it tallies up things like salary, bonuses, paid leave, health benefits, 401(k) contributions, stock options, and other perks—enabling employees to understand the full value of working at your company. Provide high-quality wellness programs—It makes sense that healthier workers are happier workers—and the research proves it. According to a survey from health services company Optum: 48% of employees who frequently participate in health and wellness programs are extremely likely to recommend their employer to others Employees who had access to more than seven wellness programs (like biometric screenings, wellness coaching, fitness challenges, and more) were one-and-a-half times more likely to continue working for their current employer and three times more likely to recommend their employer to others Support employees’ financial wellness, too—Studies show that financial stress can have a damaging impact on business output, lead to higher employee turnover, and increase recruiting costs. Beyond paying fair wages, what can you do to help? Consider partnering with a 401(k) plan provider like Betterment who can help your employees plan for long- and short-term financial goals ranging from retirement to an emergency fund to a new house. Betterment helps employees create a personalized plan to help them save for the retirement they envision. Plus, it enables employees to link their outside assets, making it easy for them to see the full picture of their finances and incorporates automated features to help employees stay on track toward their goals. Our retirement advice and automated tax saving strategies like tax loss harvesting can help them avoid unnecessary taxes and save more for the long term. Provide opportunities to learn and grow—According to LinkedIn, 94% of employees say they would stay at a company longer if it invested in their learning and development. In addition to gaining new skill sets and experience, employees also benefit from knowing their company cares about their success. Beyond sponsoring short professional development courses, consider paying all or part of your employees’ undergraduate or graduate education in exchange for continuing to work at the company for a specified period of time. This kind of tuition reimbursement program is win-win for you and your employees! Be flexible with schedules—As we’ve seen during the COVID-19 pandemic, telecommuting is sometimes necessary—and many employees like it! In fact, according to Global Workplace Analytics, 80% of employees want to work from home at least some of the time.1 So if an employee asks for a flexible or non-traditional schedule—for example, working from home three days—give it serious consideration. Learn more about the benefits of remote work. Make their commute a little easier—In addition to allowing employees to work from home if it’s feasible, consider ways to improve their commute. Let them skip rush hour—If employees have a killer commute, allow them to work 10-6 or 7-3 instead of the typical 9-5. Offer transportation—Whether it’s a company-sponsored shuttle or an organized car-pooling system, brainstorm ways to make their commute less stressful. Provide commuter benefits—With this benefit, your employees can set aside pre-tax money to pay for public transportation and paid parking. Want to sweeten the deal? Kick in some money, too! 10. Encourage a healthy work-life balance—It’s easy to talk about “work-life balance” but it’s another thing to really encourage it. Tell your employees to take their vacation days, don’t text them at midnight on a weekday, and acknowledge that they have a vibrant life away from the office that deserves their attention, too. Formalize a mentorship program—Beyond the onboarding process and initial training, employees often need (or want) ongoing mentorship. The mentor isn’t necessarily the person’s direct manager. In fact, it’s often a senior leader in a different department who can offer a unique perspective on leadership and growth within the company. Concrete guidance and a sympathetic ear could be just what your employees need to stay the course. Show employees their career path—Most employees don’t see themselves toiling away in the same job for the entirety of their career. Be sure they can see the path forward to promotions and pay bumps. By clearly defining the skills they need to acquire and the goals they need to attain, you can help employees stay focused and excited about their career development and future at your company. Give feedback (and ask for it)—Annual performance reviews can help employees understand where they are year over year, but regular check-ins are extremely useful, too. Also, think about asking your employees what you could be doing better. Although sometimes it can be hard to accept negative feedback, it’s critically important to building relationships and developing as a leader. Make sure the coffee is hot (and your company culture is on point)—A hot, fresh cup of coffee, free snacks, an open-door policy, a “hi” from the CEO in the hallway—sometimes it’s the simple things that make employees feel like their employer cares. Creating a positive company culture and employee experience takes work. Ask yourself: What makes our company unique? What are our values? What is our leadership structure? What distinguishes our work environment? Enhance your engagement—Especially during the COVID-19 crisis—when you can’t just chat by the coffeemaker or greet employees in the hallway— engagement is important. A recent Harvard Business Review article recommends nominating one trusted staffer to be responsible for regularly checking in on employees’ wellbeing over the next three to six months. This way, any concerns, fears, and other issues are caught before they escalate (or result in employees looking for an exit). Encourage workplace BFFs—Yup, that’s right—having a co-worker as a best friend can dramatically increase employee engagement. Research shows that women who strongly agree they have a work best friend are more than twice as likely to be engaged. And for both women and men, having a best friend at work leads to better performance. So how do you foster friendships among colleagues? Encourage collaboration, foster team building, and consider hosting happy hours or other social events. 17. Say “thank you”—Giving your employees recognition and showing your sincere appreciation can go a long way toward improving your retention rates. There are many ways to say “thanks, you’re doing a great job”: Publicly recognize employees in group meetings Host a pizza or donut party Give them a shout-out on Facebook, Twitter, or Instagram Send a hand-written thank you note Recognize birthdays and employment anniversaries Focus on diversity and inclusion—Many companies are working to make their workplaces more inclusive—and research shows that it pays off. In fact, a recent survey found that 63% of executives say their diversity and inclusion (D&I) programs help with employee retention. Leave on good terms—Sometimes you do all you can to help retain your top employees, and they still want to leave. That’s okay. But the last thing you want is for great employees to leave your company with a bad taste in their mouth. Not only will they likely never come back, but they may even share their negative opinion with other people in their professional network. Want to develop a positive exit experience? Gallup recommends: Taking the time to make employees feel heard Thanking employees for their contributions to the company Turning past workers into brand ambassadors by staying in touch with company news or referral opportunities Betterment can help you retain great employees Now that you know 20 ways to help retain employees, you may be wondering: “How can Betterment help?” Well, as a leading 401(k) provider, we can help you design a plan that your current employees appreciate (and that bolsters your recruitment efforts). A Betterment 401(k) plan is: Extremely cost-effective—Our fees are a fraction of the cost of most providers. That’s good news because after reading our list of employee retention strategies, you may have a few other investments you want to make. Easy for you to manage—Our intuitive platform works to reduce your administrative burden. Your customized dashboard will keep you informed of what you need to do and when you need to do it—making 401(k) plan administration simple. Designed to make your employees feel valued—This isn’t a one-size-fits-all retirement planning experience. Betterment offers employees a personalized plan to help them strive for their own unique goals. -
Thinking of Changing 401(k) Providers? Here’s What You Should Know
Thinking of Changing 401(k) Providers? Here’s What You Should Know If you’re considering changing 401(k) providers, be sure to spend some time assessing your current situation and prioritizing your criteria. Perhaps you’re unhappy with the amount or quality of support. Or you’re hearing too many complaints from your employees. Or your employees aren’t receiving the education and communications you had hoped for and engagement in the plan is low. Or you’ve learned you’re paying more than you should be (this is more common than you might think!). Or you're making other changes to your tech stack (payroll provider, etc). Or you’ve simply outgrown the provider you hired when all your organization needed was a bare-bones 401(k) plan. Whatever the reason, it’s not unusual for companies to change their 401(k) provider from time to time. Changing providers does not mean that you are terminating your 401(k) plan (which has legal ramifications including not being able to establish another 401(k) plan for a year). When you change providers the plan itself stays intact, although it is not uncommon to make plan design changes at the same time. Even if there is no specific pain point with your current provider, it’s good practice to periodically review your plan provider in light of the competition to be sure your plan is keeping up with industry best practices and that you and your employees are getting good value for your money. Before you start your search Before you undertake a search for a new provider, you should gather relevant materials on your current 401(k) plan and assess your current situation to help define which criteria are most important to you. It’s also a good time to read through your current agreement to see if it reveals information that you may not have been aware of. Although some of the areas bleed into one another, be sure to consider: Current Fees -- do you know how much you and your employees are paying all-in? 401(k) plan fees can be complicated and often include fees that are embedded within the fund expense ratios. Your fee disclosure documents, required to be provided to you, should give you the information you need to know and allow you to accurately identify all of the fees paid by you or the participants (charged against plan assets). Ongoing fees may include recordkeeping fees, audit fees, compliance fees, investment management fees, legal fees and fund fees. In addition, you’ll want to be sure you capture one-off fees such as amendment fees, termination fees and (for participants) individual service fees such as loan fees and QDRO fees.Fees can vary greatly, especially when it comes to the number of assets in a plan. Smaller plans often pay significantly more than larger plans simply because they lack economies of scale. If your plan has grown substantially and you have not seen a fee reduction, chances are you may be paying too much. Fee comparisons can be hard to come by, but one source is the 401k Averages Book. Fiduciary Responsibilities - be sure you know what level of fiduciary responsibility your current provider assumes and whether you want your new provider to have that same level of responsibility, take on more fiduciary responsibility, or whether you’re comfortable taking on more fiduciary responsibility yourself.With respect to investments, the provider may be an ERISA 3(21) fiduciary, who provides only investment recommendations; an ERISA 3(38) fiduciary, who provides dictionary investment management; or may not be a fiduciary at all. With respect to administration, the provider may or may not provide ERISA 3(16) services; however, there can be a wide range of functions that fall within that, so refer to your agreement to be sure you know exactly which services they are responsible for (and which be default fall to you as plan administrator). Current Investments -- This may be dependent upon the level of investment fiduciary responsibility, but for starters, what is the investment philosophy of your current provider and does that approach align with the needs of your employee demographic. Remember that as a fiduciary, you have an obligation to operate the plan for the benefit of your employees, so this isn’t about what you or a handful of managers want from an investment perspective; it’s about what would serve the best interests of the majority of your employees. You’ll want to be sure you know: What are your current investment options? What kinds of vehicles are used (mutual funds? ETFs?) Are funds passively (i.e., indexed) or actively managed? Are funds reasonably-priced? Is participant investment advice incorporated into the approach? For an additional fee? How personalized is the advice? What is the default investment (used when participants fail to make an investment election and money is deposited into their account), and how personalized is it to each participant? Do participants have investment flexibility? Current Plan Design - what features (automatic enrollment, Safe Harbor, etc) about your current plan do you plan on retaining? Are there features you would like to add/change/remove when you change providers? Now may be a good time to consider these. Current Service -- Although you and other team members may have opinions about the quality and level of service to you as a plan sponsor, be sure you also gather information about the level and quality of service your employees receive from your current provider. Payroll Integration - whether or not your current 401(k) provider is integrated with your payroll provider, how smoothly have things been running? Is payroll integration something that is important in a new provider? Be sure you understand the different levels of payroll integration and which responsibilities you may retain. Compliance and Audit Support - Are you getting the compliance and audit support that you need without any unpleasant surprises? Are documents provided for your review and approval accurate and timely? When you’ve needed to consult on compliance issues, do you receive clear and helpful answers to your questions? Does the provider deliver a comprehensive audit package to you if you need it and collaborate well with your auditor? Participant Education - What kinds of educational resources are available to your employees not only when they first become eligible for the plan, but on an on-going basis as well? Does the platform help employees establish their retirement goal and track their progress toward it? User Interface - How easy is the user interface and how well does it meet the needs of your employees? Is it easy for them to make changes, find information? Financial Wellness - Does your provider help employees beyond the 401(k)? Does the platform allow them to sync outside accounts and track other financial goals? Participant Engagement - Are your participants making good use of the plan, with a healthy majority of employees making contributions at healthy rates? If not, is it because of the plan design or is it more a function of the provider's tools, resources, and approach? For instance, is there enough guidance to help people make decisions or are employees left to their own devices to determine how much to save and which funds to use? Although only larger companies are likely to undertake a full-blown Request for Proposal in the hunt to identify a new 401(k) plan, it’s a good idea to document and rank your criteria. In this way, you can be sure to cover all relevant topics with each provider under consideration and have a record of your decision-making process. The selection of a 401(k) provider is, after all, a fiduciary decision. What to expect when changing providers It may be helpful to understand the framework of the process involved with changing 401(k) providers so that you can manage expectations internally and create reasonable timelines. Typically, changing providers takes at least 90 days, with coordination and testing needed between both providers to reconcile all records and ensure accurate and timely transfer of plan assets, so you’ll want to plan accordingly. Once you have identified your chosen successor provider and have executed the services agreement, the high-level steps involved include: Notify your current provider of your decision (you may hear them refer to this as a “deconversion” process) Establish timeline for asset transfer and go live date with new provider Review your current plan document with the new provider This will give you an opportunity to discuss any potential plan design changes. Be sure to raise any challenges you have faced with your current plan design as well as any organizational developments (planned expansion, layoffs, etc) that may impact your plan Investment selection If your new provider is a 3(38) investment fiduciary, you will likely have nothing to do here since the provider has discretionary investment responsibilities and will make all decisions with respect to fund selection and monitoring. If your new provider is NOT a 3(38) investment fiduciary, then you will have the responsibility for selecting funds for your plan. The plan provider will likely have a menu of options for you to choose from. However, this is an important fiduciary responsibility, and if you (or others at your organization) do not feel qualified to make these decisions, then you should consider hiring an investment expert. Review and approval of revised plan documents Communicate change to employees (including required legal notices), with information on how to set up/access their account with the new provider Blackout period The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period. Transfer of assets and allocation of plan assets to participant accounts at new provider FAQs for Changing Providers What are the most common reasons that companies change 401(k) providers? Common reasons to consider changing 401(k) providers include: High fees Low levels of customer support (for you as plan sponsor and/or your employees), including support with compliance and/or audits Lack of employee guidance, advice, and education that lead to low levels of engagement and/or employee complaints Poor investment performance Lack of features Although one factor may have been the catalyst for your organization to consider changing providers, do not let that overshadow a thorough and fair assessment of other elements that should be taken into account. Remember, choosing a 401(k) provider is a fiduciary act and should be clearly documented and carefully evaluated. What happens during a 401(k) blackout period? The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period. What happens to an employee 401(k) loan if my company changes providers? The outstanding loan will be transferred from the old provider to the new provider. Remember, the plan remains intact, and the loan is from the plan, not the provider. Repayments are made to the employee’s account. -
Pros and Cons of Safe Harbor and Traditional 401(k) Plans
Pros and Cons of Safe Harbor and Traditional 401(k) Plans Both types of plans can successfully help employees save for retirement, but each has its pros and cons. Learn which type of plan might be better for your organization. Employers who are considering offering a 401(k) plan must balance how to help employees save for retirement in a cost-effective manner with the critical administrative considerations including how to ensure the plan operates in a compliant manner and retains its tax-qualified status. At a high level, there are two types of 401(k) plans: the Safe Harbor 401(k) Plan and the Traditional 401(k) Plan. Both types of plans can successfully help employees save for retirement, but each has its pros and cons. Learn which type of plan might be better for your organization. Traditional 401(k) Plans Traditional plans can be cost-effective but must pass certain testing mandated by the IRS. Pros: Employee Incentive - A 401(k) plan is one of the most important benefits that employees look for while exploring their career options. And it comes with significant tax advantages in helping employees save for their future. Cost-Effectiveness - Because there are no required employer contributions, traditional plans may be more cost-effective for the company. Discretionary Contribution - Plan sponsors can decide to match employee contributions or make profit sharing contributions on a discretionary basis, which provides significant flexibility. Each year, employers can choose how much they would like to contribute, or whether they want to contribute at all. Cons: Required Annual Testing - Traditional plans are subject to all compliance tests, including the ADP, ACP and top heavy determination. If one or more of these tests fail, the plan sponsor is subject to corrective actions which can include additional contributions on behalf of the employees. Limits of Contributions for Employees - Because of the ADP test, highly-compensated employees (HCEs) may not be able to maximize their 401k contributions. If HCEs do contribute the maximum amount, and the plan fails the ADP test, required refunds may increase taxable income for certain HCEs. Administrative Burden - The required tests and possible failures may lead to uncomfortable conversations with employees who are impacted by such failures. They will need to understand why they are receiving refunds of their contributions and may not be able to maximize their 401(k). Safe Harbor 401(k) Plans Safe Harbor plans may be a better choice for employers looking for ways to bypass certain compliance tests. In return for the “safe harbor” status, employers are required to make employer contributions. Pros: Annual testing exemption — A safe harbor plan will be automatically deemed to pass some of the crucial compliance tests such as the ADP and ACP tests, as well as the top-heavy test. Maximize contributions — Because they can bypass certain compliance tests, everyone in the plan can maximize their contributions to the allowable IRS limits, without having to worry about refunds. Taxable income reduced — Employer contributions made as part of the Safe Harbor plan design are tax-deductible, reducing the employer’s taxable income. Improved employee retention — The required mandatory employer contributions mean the 401(k) plan will be an attractive benefit to employees, which can help attract and retain talent and encourage healthy plan participation. Cons: Cost of annual contributions — Safe Harbor plans require mandatory employer contributions on behalf of employees. The employer must be able to provide these contributions every pay period or at the end of the plan year. Failure to do so may result in the plan losing its tax-qualified status. Immediate vesting requirement — Safe harbor contributions must be immediately vested. Once an employer contribution is deposited into an employee’s account, the employee is 100% owner of that money. Annual requirements — A Safe Harbor notice must be delivered to all plan participants every year, at least 30 days prior to the plan year-end. What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year? If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year! Which to choose: Traditional or Safe Harbor 401(k)? The “right” plan for any given organization depends on many factors. The table below provides some insight into which plan design may be more helpful for any given factor, but each organization will need to make its own determination. Betterment is happy to assist with this process. Traditional Safe Harbor Explanation Employee Count 30 + employees Any plan size With few employees, even a small number of HCEs contributing at a relatively high level may make it difficult for plans to pass testing. In addition, the required employer contribution may be more manageable. Employee Demographic Employee base consists largely of full-time employees; Low turnover rate Stable headcount Employee base includes a large number of part-time and/or seasonal employees working <500 hours a year Part-time/seasonal employees are excluded from the plan Safe Harbor plan design is helpful if the employee base is more fluid, which may make it more difficult to ensure the plan will pass testing each year. Participation High (current or expected) participation and contribution rates among the general employee population Owners and officers looking to maximize 401(k) contributions every year With Safe Harbor, owners and offers can maximize contributions without having to worry about potential refunds. Company Cash Flow Less predictable cash flow year over year Consistent and adequate cash flow Since Safe Harbor plans require employer contributions, consistent and adequate cash flow is needed. Previous Compliance Result Passed ADP/ACP Test Deemed not “Top Heavy” Failed ADP/ACP Test Deemed “Top Heavy” Safe Harbor plan design bypasses certain compliance tests, so “failing” them is no longer a concern. Current/Future Plan Design Lenient or no eligibility requirement Automatic enrollment with a high default rate Strict eligibility requirements (i.e. must work 1,000 hours in 12 months to become eligible); No automatic enrollment (or if offered, low default rate) NHCEs contributing at relatively low contribution rates (or not contributing at all) do not cause issues under Safe Harbor plan design. -
CARES Act and 401(k)s: Additional IRS Updates
CARES Act and 401(k)s: Additional IRS Updates The latest notice from the IRS expands the definition of those qualified to take advantage of CARES Act 401(k) distribution and loan relief. IRS Notice 20-50 The IRS continues to release updates to the CARES (Coronavirus Aid, Relief, and Economic Security) Act in response to a growing number of outstanding questions. This latest notice, IRS Notice 20-50, provides further clarification and additional benefits to participants impacted by COVID-19. As a refresher, the CARES Act was signed into law in late March and allows qualified individuals to take coronavirus-related distributions of up to $100,000 from their eligible retirement accounts (including IRAs) until December 30, 2020. These distributions are not subject to the 10% early withdrawal penalty that would typically apply to certain distributions taken prior to age 59-½. The CARES Act also relaxes normal retirement plan loan provisions and repayment terms. For loans taken between March 27, 2020, and September 22, 2020, the maximum loan amount has been increased from $50,000 to $100,000 of the vested balance. Additionally, participants are able to delay their loan repayments for up to one year if they fall between March 27, 2020, and December 31, 2020. With Notice 20-50, the IRS has expanded the definition of “qualified individual.” Specifically, a qualified individual is now considered to be anyone who: Is diagnosed, or whose spouse or dependent is diagnosed with the virus; Experiences adverse financial consequences due to COVID-19 as a result of: the individual, the individual’s spouse, or a member of the individual’s household (that is someone who shares the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced; being unable to work due to lack of childcare; closing or reducing hours of a business that they OWN or operate; having pay or self-employment income reduced; or having a job offer rescinded or start date for a job delayed. The notice also clarifies that qualified individuals can claim the tax benefit of the coronavirus-related distribution rules even if their employer did not implement these COVID-related distribution and loan rules. In this Notice, the IRS also added a “Loan Safe Harbor” to the CARES Act, which permits plan sponsors to delay or suspend loan repayments for up to 1 year if those repayments otherwise would have been made from March 27, 2020, through December 31, 2020. Under this Safe Harbor: Loan repayments will resume when the suspension ends. This means that the repayments will resume as of January 2021 if the suspension goes through December 31; The term of the loan may be extended up to one year after the date the loan was originally due even if it will exceed 5 years; and The loan and the additional interest on the unpaid balance must be re-amortized as of January 1, 2021, to the new date. 401(k) regulations related to COVID-19 continue to evolve. Betterment is actively reviewing updates as they are published and encourages employers and others to refer to the notice for more information. -
Should Your Business Continue to Work Remotely? 7 Benefits to Consider.
Should Your Business Continue to Work Remotely? 7 Benefits to Consider. Companies that were once uncertain about remote work are now capitalizing on the benefits of remote work. Around the world, millions of employees are working in the comfort of their homes—not by choice, but by necessity. As the COVID-19 pandemic forces people to shelter in place, companies that were once uncertain about remote work are now seeing the silver lining of benefits. The Brookings Institution estimates that up to half of American workers are currently working from home, more than double the number who worked from home (at least occasionally) in 2017-2018. This large-scale, work-from-home experiment is revealing the pros and cons of telecommuting in real-time. If you’re a business owner or manager, you may be asking yourself: “After the pandemic is over, should we continue working from home?” Making a temporary situation permanent According to a recent survey from Gartner, 74% of Chief Financial Officers intend to shift some employees to remote work permanently after the pandemic is resolved. “CFOs, already under pressure to tightly manage costs, clearly sense an opportunity to realize the cost benefits of a remote workforce. In fact, nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions,” said Alexander Bant, practice vice president, research for the Gartner Finance Practice. Of course, not every job is suited to be done remotely—and there are downsides. Notably, managing remote teams can be more challenging, staff members may feel isolated working at home, and instead of becoming more productive, some employees may become more distracted. Despite these potential disadvantages, more CFOs, business owners, and managers are recognizing that remote work can deliver significant cost savings (and other benefits) in the long run. Let’s delve into the top benefits of telecommuting. Save money First and foremost, telecommuting can save your small business a significant amount of money. With all or some of your employees working from home, you’ll be saving money on: Real estate—Currently, you may be locked into a lease for a period of years. However, if you decide to downsize your office space or forgo it entirely in the future, you’ll save a significant amount of money. Operational costs—From heating and air conditioning to office supplies and copy machines, you’ll likely be able to cut many operational costs. However, you may incur costs associated with setting up your employees’ home offices and implementing telecommuting systems and software. Perks—When employees work at home, they make their own coffee (or swing by a local coffee shop), prepare their own lunches, and pour their own beers for Zoom happy hours with their co-workers. With a remote team, you can switch these office perks to invest in valuable benefits such as starting a 401(k) plan or increasing your company matching contributions. So how much could you save? According to a March 2020 report from Global Workplace Analytics, a typical employer can save an average of $11,000 per half-time telecommuter per year. It’s the net sum of things like increased productivity, lower real estate costs, reduced absenteeism and turnover, and better disaster preparedness. Want to calculate your own savings? Global Workplace Analytics offers a free TeleworkSavings Calculator™. Make employees happy According to Global Workplace Analytics, 80% of employees want to work from home at least some of the time.1 In particular, Millennials appreciate flexibility and remote work opportunities. Telecommuting is such a draw that office workers would even take a pay cut if they could work from home! More than a third of workers would take a pay cut of up to 5% in exchange for the option to work remotely at least some of the time; a quarter would take a 10% pay cut; 20% would take an even greater cut.2 Improve employees’ financial wellbeing Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. However, telecommuting can help your employees cut costs, improve their work-life balance, and boost their financial wellbeing. In fact, employees could save hundreds (or even thousands) of dollars on commuting expenses, take-out lunches, and even business clothes! According to a USA Today interview with FlexJobs, remote workers typically save about $4,000 a year by telecommuting. The money employees save can help them improve their current standard of living, invest for retirement and other long-term goals, and gain an overall sense of financial wellbeing. Increase productivity While the perception is that remote workers work less, the reality is actually quite different. A recent study from Airtasker , a gig economy platform, which surveyed more than 1,000 full-time employees across the United States, 505 of whom worked remotely, found that: Remote workers averaged 27 minutes of unproductive time a day, compared to 37 minutes for in-office workers Remote workers worked an average of 1.4 more days every month (or 16.8 more days every year) Plus, a remote job eliminates many of the typical “time sucks” of the average in-office workday like lengthy commute times, chats by the water bubbler, and unnecessary meetings. Minimize workforce turnover If you ask someone what they don’t like about their job, you’ll get a lot of different answers. “I hate my commute!” “My schedule isn’t flexible!” “I work so hard, but I don’t earn enough money.” “My boss micromanages me!” Many of these common reasons why people are dissatisfied at their job can be solved through remote work. By trusting your employees to telecommute, you give them the flexibility, free time, and money they need to be happy enough to stick around. Hire the best talent (regardless of location) Relocation expenses ranging from moving services to temporary housing can cost your company thousands of dollars per employee. Instead, consider hiring the best talent from around the world, allowing them to work remotely. You’ll save significant upfront costs and be able to draw from a larger pool of talented potential staff members (who may also strongly prefer to work from home). Plus, if your company is based in a city with a high cost of living and you hire a remote worker in a rural, lower cost of living area, you may be able to pay them a lower rate that’s still competitive for their location. Keep your business on track in the best (and worst) of times As we’ve witnessed over the last several weeks, companies that had already invested in telecommuting software—and had a corporate culture conducive to remote work—were able to more smoothly transition their workforce. While we hope that COVID-19 is the last pandemic that the world ever faces, the fact of the matter is that business disruptions happen. Whether it’s a major tropical storm or a health crisis, it helps to have a contingency in place that allows your employees to work remotely on a full-time or part-time basis. Capitalizing on the benefits of remote work If you decide to reap the benefits of telecommuting, you may be wondering: “What should I do with all the money my company saves?” Well, it’s a perfect opportunity to invest in your company’s future by starting a 401(k) plan or adding a company match. According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was important in their evaluation of a job offer. By providing this valuable benefit, you’ll improve your company’s ability to recruit and retain top talent. Plus, living and working through a pandemic is challenging for everyone. Reward your employees and show how much you appreciate them by investing in their futures with a 401(k) plan. There’s never been a better time to start a 401(k) plan than right now. With the recent passage of the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Also, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. See how. Betterment makes it easy for you to offer your employees a better 401(k)—at a fraction of the cost of most providers. Want to learn more? Let’s talk. https://globalworkplaceanalytics.com/telecommuting-statistics(State of the American Workforce, Gallup, 2016) https://globalworkplaceanalytics.com/telecommuting-statistics(State of Remote Work 2019, Owl Labs) -
Should I Offer Stock Options to My Employees?
Should I Offer Stock Options to My Employees? Betterment’s Head of Tax answers commonly-asked questions that small business owners often have about stock options. Conversations with Small Business Owners: Betterment understands the challenges that small business owners face. In this series, we interview various Bettermenters on topics that we hear from prospects and clients. Have a question for us? Let us know! In this first article, Eric Bronnenkant, Betterment’s Head of Tax, answers commonly-asked questions that small business owners often have about stock options. Can you briefly explain what stock options are and how they work? Stock options are a common way for privately-held start-up companies to incentivize employees. They are awarded to employees, granting them the right to purchase shares, usually over a period of time according to a vesting schedule. The predetermined stock purchase price is the strike (or exercise) price, paid when the buy option is exercised. The hope is that the shares will be worth more in the future. How do stock options incentivize employees? Employees are incentivized by their paycheck, of course, but stock options can help supercharge that incentive in that they provide equity potential. They can help employees consider how their decisions and actions contribute to the company’s success. With stock options, when the company does well, employees also benefit. So compared to pure cash compensation, stock options do a much better job of aligning the company's interests with the employees' interests. They may also help with employee retention because they are usually awarded over a period of time. What are the different types of stock options? There are many different types of equity compensation, but the two types of stock options are non-qualified stock options and incentive stock options. The biggest difference is whether the discount of the stock option (the current market value less the strike price) is treated as compensation to the employee. For a non-qualified stock option, the discount is considered to be compensation to the employee at the time of exercise. For the incentive stock option, that discount is generally not considered to be compensation. So the real benefit of the incentive stock options over non-qualified options is the potential to convert what would otherwise be treated as compensation into capital gains. Capital gains generally have a lower tax rate than compensation taxes. What would cause an employer to choose one over the other? I would say that the most common reason that an employer would choose the incentive stock option is that they don't need to pay the employer portion of payroll tax on the compensation that would be paid on the non-qualified side. And it ultimately shifts all of the tax benefits and burdens over to the employee. In addition, the tax deduction that comes with the non-qualified stock options is not really valuable if your company isn’t profitable, which is the case for most early-stage companies. However, once your firm becomes profitable, having the tax deduction on non-qualified options becomes much more valuable. When might it make sense for companies to consider offering stock options? One of the most attractive reasons for using stock options for an employer is that, up front at least, it doesn't cost any money to issue the stock options. So it allows an employer to potentially provide a lower salary in exchange for more potential equity upside. Businesses that are just starting out typically have very limited resources and are trying to maximize how they're going to use those resources. Compensation is usually a large part of that decision making process, especially for service-based companies. One way to reduce that cash compensation cost is to shift that mix from 100% cash to, for example, 75% cash and 25% stock options. That frees up cash to hire other employees or invest in new products for the business. In other words, stock options maximize the use of the available cash resources. Even companies that are just starting out will want to do some kind of benchmarking to be sure they can attract the kind of talent they want and so may determine that stock options make sense. After that, I would say you would want to evaluate your equity compensation arrangements on an annual basis. How are stock options taxed? For the employer, taxation is related to which type of option you’re talking about and whether the discount is treated as employee compensation. As mentioned earlier, when non-qualified stock options are exercised, any discount (where the current market value is greater than the strike price) is treated as compensation to the employee. In addition, any future appreciation is treated as a capital gain. For the employer, employee compensation is a deduction to the business. With Incentive Stock Options, there is no tax deduction for the employer. For the employee, in general, there is no income tax on exercise. The entire gain upon sale is treated as a capital gain. However, the employee may owe alternative minimum tax (AMT) upon exercise but that is dependent on many other factors. Are there other equity compensation structures that companies may wish to consider? Late stage start-ups, say those that are pre-IPO, may wish to consider restricted stock units (RSUs) which means employees who work for a certain period of time will typically be entitled to something regardless of the performance of the stock. With stock options, the stock has to appreciate in value in order for the employee to benefit. Would firms who want to go this route typically convert existing options to RSUs? It really depends on the kind of goals of the employer. If the employer wants to make sure that employees are getting rewarded for working for whatever their vesting requirement is, then they may be likely to convert over to the RSUs. But typically, RSUs are used for new equity grants and the original stock options would be left alone. How do stock options fit into an overall benefits package? Small companies, especially those in highly competitive industries or geographic areas, have to consider their overall compensation package to attract and retain top talent. Stock options may be one method to do that, but more traditional benefit components shouldn’t be overlooked and can serve as good complements to stock options. For instance, 401(k)s are almost a “must-have” benefit these days, but not all 401(k)s are the same. Some are much better at engaging employees, helping them save more for retirement and becoming more financially confident and secure—all of which could be especially important if options don’t pay off. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
Want to Boost Your 401(k) Plan’s Participation Rate? Here’s How.
Want to Boost Your 401(k) Plan’s Participation Rate? Here’s How. Offering employees a 401(k) is a great first step toward helping them build a better future. The next step is to make sure they’re taking advantage of the plan. Offering employees a 401(k) plan is a great first step toward helping them build a better future. But the next step is to make sure they’re taking advantage of the plan. Wish your 401(k) employee participation rates were higher? You’re not alone. According to the U.S. Bureau of Labor Statistics, in March 2019, 77% of workers in private industry with access to a retirement plan were taking advantage of it. However, this rate varies dramatically by employee characteristics, industry, income level, and company size. In particular, lower wage workers (54%) and companies with fewer than 100 employees (71%) had lower 401(k) participation rates. How do your employee participation rates compare to these average rates? Take a closer look at the data at the U.S. Bureau of Labor Statistics. Why does 401(k) participation matter? For business owners, running a successful 401(k) plan is a significant investment of time and money. But if current (and prospective) employees appreciate the value of their retirement benefits, it’s well worth the investment. In fact, according to a Betterment for Business survey, 67% of plan participants said that a good 401(k) was very important or important when evaluating a job offer. However, if employees aren’t participating in the plan, this great benefit can fall flat. Plus, many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus. This can have a damaging impact on business output, lead to higher employee turnover, and increase costs associated with hiring and retention. By encouraging employees to make the most of the retirement savings plan, you can help reduce their financial stress and allow them to focus on what matters most. So how do you turn things around and boost employee participation? Consider these 6 simple ways to boost your 401(k) plan participation rates: 1. Take the easy way out—Yup, that’s right—add automatic enrollment to your 401(k) plan and see your participation rates skyrocket! It’s a great way to help your employees save for their future without lifting a finger. (And pick a higher initial deferral rate—such as 5% or 6%—to help employees save more.) There are three different types of auto-enrollment arrangements: Basic Automatic Contribution Arrangement (ACA) When employees become eligible to participate in the 401(k) plan, they will be automatically enrolled at preset contribution rates. Prior to being automatically enrolled, employees have the opportunity to opt out or change their contribution rates. Eligible Automatic Contribution Arrangement (EACA) EACA is similar to ACA, but the main difference is that employees may request a refund of their deferrals within the first 90 days. Qualified Automatic Contribution Arrangement (QACA) QACA has basic automatic enrollment features. However, it also requires both an annual employer contribution and an increase in the employee contribution rate for each year the employee participates. For this reason, a QACA 401(k) plan is exempt from most annual compliance testing. 2. Try again—If employees opt out of automatic enrollment, that’s it, right? Well, not quite. According to the Plan Sponsor Council of America, in 2018, nearly 8% of plans annually re-enrolled employees who had previously opted out (that’s up from 4% that did so in 2013). Want to learn more about automatic enrollment? Read this article. 3. Give away “free money”—A 401(k) match, safe harbor, or profit sharing contribution offers a way to reward your employees and incentivize them to save for their future through your 401(k) plan. A matching contribution may not only increase your participation rate, but may help employees contribute enough to maximize the match (so think hard about how to structure that match!). 4. Eliminate or reduce the waiting period—Do you require employees to wait six months or longer before they join the 401(k) plan? Consider eliminating or shortening the waiting period. This way, you can promote the 401(k) plan during new employee orientation meetings and offer them the opportunity to sign up right away. 5. Offer employees the advice and guidance they need—The decision to invest in your 401(k) plan is a lot less intimidating if employees know they’re going to have help. Betterment offers personalized guidance to help employees make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. 6. Let employees know they can access their money in an emergency—If your employees are nervous about investing in the plan because they won’t have access to their money, consider adding loan and hardship withdrawal provisions. While taxes and penalties will hopefully discourage employees from using the funds unless they really have to, just knowing these features exist may provide the comfort some individuals need to participate. 7. Make the 401(k) plan participation rate known—Make the 401(k) plan participation rate part of your internal reports to help promote engagement. Consider assigning goals to encourage management (including those beyond human resources) to assist in boosting those numbers. 8. Communicate (and communicate some more)—Get the word out about your 401(k) plan. By promoting the benefits of the plan, you’ll likely be able to boost your plan participation rates (and even increase contributions). Consider showing the impact of plan contributions with compelling savings rate charts like this one: When it comes to selling the benefits of the plan, be sure to highlight things like contribution limits, the impact on income taxes (and how they’ll likely pay fewer tax dollars), and more. And find creative ways to encourage participation: talk up your own 401(k) plan participation as an example of what to do and what got you started. Consider asking respected and/or more tenured employees to talk about the importance of starting early. Betterment can help If you’re struggling with participation rates, take a hard look at your 401(k) plan. It may be time for a change. A Betterment 401(k) offers: More for your money—Our fees are well below the industry average, and we always tell you what they are so there are no surprises for you or your employees. Plus, lower fees mean that more money is staying invested for your employees. An easy-to-use platform—Our intuitive platform and goals-based approach help employees see their entire financial picture, with the ability to link outside accounts. Personalization for your employees—Our tech-forward solution takes into account employees’ age, savings, and retirement goals to create a personalized plan to help them save for the retirement they envision. A Betterment 401(k) plan can be better for your small business—and better for your employees. -
Why Employee Engagement Matters Now, More Than Ever
Why Employee Engagement Matters Now, More Than Ever Employee engagement is critical to the wellbeing of your workforce and company. Learn what employee engagement really means and how your company can improve. Across the United States and around the world, people are sheltering in place due to the COVID-19 pandemic. It’s far from “business as usual,” yet many employees are managing to stay productive and positive through it all. It’s a testament to people’s resilience—and to businesses’ effective employee engagement strategies. Now more than ever, employee engagement is critical to ensuring the wellbeing of your workforce and company. But what does employee engagement really mean and how can you improve yours? Let’s start with the basics. What is employee engagement? Employee engagement is a measure of employees’ dedication to your company. Gallup defines engaged employees as those who are “involved in, enthusiastic about, and committed to their work and workplace.” Engaged employees have an emotional commitment to the company and are willing to go the extra mile to help it succeed (technically known as “discretionary effort”). What about job satisfaction? Job satisfaction can often be confused with employee engagement. Job satisfaction is the level of happiness employees feel about their position in the company. It’s great if an employee has a high degree of job satisfaction, but it doesn’t necessarily translate to increased productivity or better business outcomes. In fact, some employees might be very happy contributing very little to the company while collecting a fat paycheck! According to the HR Technologist, the factors that affect job satisfaction and employee engagement are different: Job satisfaction is driven by competitive compensation, comprehensive benefits, a good work-life balance, and professional recognition. On the other hand, employee engagement is primarily driven by inspiring leadership, career development, internal communication, and a culture of diversity. Why is employee engagement important? The bottom line is employee engagement drives your firm’s literal bottom line. In fact, organizations in the top quartile of engagement had 21% higher profitability compared with those in the bottom. However, the same study also found that only 15% of employees worldwide and 35% of employees in the United States fall into the “engaged” sector. Having an engaged workforce will help you: Improve profitability Generate new ideas and innovations Reduce turnover Increase retention Improve productivity Boost customer satisfaction Make work a happier and healthier place for all What if employees aren’t engaged? It can take a long time for you or your human resources team to figure out an employee engagement program that resonates with everyone—from new hires and millennials to seasoned staffers and executives. Want a little extra help? Ask your staff for their input by sending out an employee engagement survey quarterly. If you’re able to measure employee engagement, you’ll be better able to figure out what needs to be adjusted. What can you do to improve employee engagement during a pandemic? With employees juggling health concerns, child care responsibilities, and more, it’s easy to see how some workers are having trouble being fully present and engaged in their work. In fact, an employee survey of more than 500 working moms revealed that 81% of respondents said their ability to engage effectively at work has been negatively impacted by the crisis. Both women and men have been feeling the stress and anxiety of trying to juggle it all. So, what can you do to help? If your staff is currently working from home, it can be hard to imagine what you can do to improve employee engagement from afar. But you can. Take a look at these employee engagement ideas: Check in—A recent Harvard Business Review article recommends that you nominate one person to be responsible for regularly checking in on employees’ wellbeing over the next three to six months. This way, any concerns, fears, and other issues related to working during a pandemic are caught before they escalate. Making your employees feel heard and providing assistance when needed can go a long way toward engaging your workforce. Select the right technology—What does your staff need to be able to effectively communicate while away from the office? Help alleviate frustration and facilitate relationship building by having the right instant messaging, video conferencing, and remote technology in place. Schedule a happy hour—Many employees are missing the social aspects of working in an office. So, think about recreating that employee experience virtually with a festive Zoom happy hour, game night, or group fitness class. What are some key employee engagement strategies? Pandemic or no pandemic, some employee engagement initiatives are highly effective in any climate. Here’s a list of the top three: 1. Manage well—When it comes to employee engagement, having good leaders matters a lot. In fact, research finds that 70% of the variance in employee engagement is due to their manager. So how do you inspire your leaders to excel? Consider sending your top managers to leadership training so they can gain the skills they need to motivate, recognize, and empower their staff members. Plus, investing in your employees’ continuing education has been proven to improve engagement and retention. According to LinkedIn, 94% of employees say they would stay at a company longer if it invested in their learning and development. 2. Help employees find deeper meaning—A key component of employee engagement is helping workers connect with their job on a deeper level. You don’t want your employees to just punch a clock, do the bare minimum, and collect a paycheck. It’s better for them—and for the company—if they can find greater purpose. According to the BetterUP Labs “Meaning and Purpose at Work” report, employees who find their work highly meaningful stay at their jobs for an average of 7.4 months longer than employees who don’t. Plus, employees doing meaningful work put in an extra hour per week and take two fewer days of paid leave per year! Here are a few ways to help instill greater meaning: Allow them to excel —Have a one-on-one conversation with employees about the company goals and their personal goals, and then see how they can be aligned for success. Even better, start the discussion during the onboarding process. Show them the results (and recognize them for their contributions)—Toiling away in obscurity isn’t fun for anyone. Let your employees know that their contributions matter to the company’s bottom line and that you appreciate their hard work. Seeing the results can help employees realize that what they do makes a real difference and deepen their connection to the company. Connect to the greater good —If employees know that their work is making the world a better place, it can help deepen their connection to their day-to-day jobs. 3. Improve your company culture—It’s difficult to quantify company culture, but everyone knows it’s important. According to a Deloitte study, 82% of respondents said that culture is a potential competitive advantage. However, only 28% said they understood their culture well and only 19% said they had the “right culture.” Deloitte defines culture as “the way things work around here.” Simply put, it encompasses all the values, actions, and incentives that make an impact on employees’ daily lives. Typically, the tone is set by senior leaders and trickles down throughout the organization. Ideally, your company culture will drive higher levels of engagement. So how do you improve your culture? Well, start by taking a step back and ask yourself: What are the values that make our company special? How do we want employees to feel when they work here? How can we change our performance management or compensation processes to reflect our company culture? Are we experiencing any toxic behaviors like fraud or extreme negativity? Is there an underlying reason why it’s happening? What can we do to attract, engage, and retain exceptional workers? How do benefits amplify our company culture? (Think tangibles like salary, 401(k) plan, and health plans as well as intangibles like flexibility and creative opportunity) Betterment can help Leadership, meaningful work, and company culture are integral to employee engagement. However, another driver of employee engagement and satisfaction is competitive compensation and benefits. Looking to upgrade your employee benefits package? Betterment can help you offer a better 401(k) at a fraction of the cost of most providers. As your full-service 401(k) partner, we: Get your plan up and running fast—and assist with the ongoing administration Select and monitor your investments (We assume the risk and responsibility as a 3(38) investment manager.) Offer your employees personalized guidance to help them save for long- and short-term goals ranging from retirement to debt reduction Want more information? Talk to Betterment today. -
Paycheck Protection Program Flexibility Act of 2020
Paycheck Protection Program Flexibility Act of 2020 The Flexibility Act will greatly benefit small business owners who borrowed PPP funds, increasing their ability to have those loans forgiven. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which modifies provisions related to the forgiveness of loans made to small businesses under the COVID-19 related Paycheck Protection Program (PPP). The Flexibility Act will greatly benefit business owners who borrowed PPP funds and increase their ability to have those loans forgiven. What is being modified? The time period during which PPP loan proceeds must be spent has been modified from 8 weeks from loan origination to the earlier of 24 weeks from loan origination OR December 31, 2020. The percentage of loan proceeds that may be spent on Eligible Non-Payroll costs has increased from 25% to 40%. The deadline to restore full-time employee headcount and/or wages that were cut or decreased between February 15, 2020 and April 2, 2020, has been extended to December 31, 2020. The loan maturity term date for new loans taken after June 5, 2020, has been extended from 2 years to 5 years. Borrowers and lenders can renegotiate maturity dates of existing PPP loans. The deadline for repaying any portion of loans that are not forgivable has been extended from 6 months to the time when the lender receives the forgiven amounts from the SBA. However, if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, then the borrower must immediately begin making repayments. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
DOL Rules that 401(k) Notices Can Be Sent Electronically
DOL Rules that 401(k) Notices Can Be Sent Electronically The new “Notice and Access” Rule provides relief to the expense and burden of distributing required 401(k) notices to employees. On May 21, 2020, The U.S. Department of Labor (DOL) announced final rules allowing required 401(k) plan disclosures to be posted online or delivered via email. This new safe harbor rule was much anticipated since prior to the rule required notices could only be delivered electronically if employees satisfied the definition of being “wired at work” (or affirmatively opted to receive notices electronically). Plan participants are required to receive notices and disclosures about their 401(k) plan in a secure and timely manner. The new e-Disclosure Safe Harbor Rule provides some relief from certain administrative expenses in that it will allow new forms of electronic delivery to be the default delivery method, so long as the intended recipient can be reached electronically and receives the appropriate initial notification. The New “Notice and Access” Rule The new rule allows plan sponsors to deliver 401(k) disclosure notices electronically to all employees that are part of the plan, regardless of their employment status. As a safe harbor, this new rule includes several requirements: Initial Paper Notice - Before defaulting an individual into electronic delivery, a plan administrator must first notify the individual by paper: 1) that some or all plan documents will be furnished electronically; 2) that they have the right to request and receive paper copies of some or all of the covered documents (or to opt out of electronic delivery altogether); and 3) of the procedures for exercising such rights. Notice of Internet Availability - A plan administrator is required to send a notice of internet availability to the employee’s email address on file each time a 401(k) plan disclosure is posted to the website. Each notice of internet availability must remind the individual of his or her right to request and receive paper copies and to opt out of electronic delivery altogether, as well as the procedures to exercise such rights. Covered Disclosures and Documents - Documents must be posted online on a timely basis and written in a manner to be understood by an average employee. The 401(k) documents covered by the new rule are: Summary Plan Description (SPD) Summary of Material Modification (SMM) Summary Annual Reports QDIA Notice Annual Notice (Safe Harbor & Automatic Enrollment) Investment-related disclosures (identifying information, performance data, benchmarks, fee information, etc.) Website Standards - Documents posted under the new rule must be maintained on the website until replaced by an updated document. Posted documents must be searchable electronically and protect the confidentiality of personal information. Invalid Electronic Address - Email delivery systems must include invalid electronic address alerts. Once an invalid address has been identified (e.g., email is returned as undeliverable), the problem must be fixed by sending the notice to a secondary email address on file (work email vs. personal email). If this issue is not able to be resolved, the individual must be treated as if they had opted out of electronic delivery and be sent a paper version of the documents as soon as possible, until a new valid email address has been obtained. -
Small Business Paycheck Protection Program and 401(k)s
Small Business Paycheck Protection Program and 401(k)s Understanding rules surrounding Paycheck Protection Program funds with respect to employer contributions can help ensure they qualify for loan forgiveness. The Paycheck Protection Program (“PPP”) is a $660 billion aid program of the CARES (Coronavirus Aid, Relief, and Economic Security) Act to provide loans to companies with 500 or fewer employees. The loans may potentially be forgiven as long as the business utilizes the funds in accordance with PPP provisions. Eligible Costs that Qualify for PPP Loan Forgiveness Your business will need to repay PPP funds if the loan is used for anything other than payroll costs, mortgage interest, rent, and utilities payment. You may also owe money if you do not maintain certain staffing and payroll levels as follows: Staffing: Loan forgiveness will decrease as the full-time employee headcount decreases Payroll: Loan forgiveness will decrease if salaries and wages are decreased by 25% for any employee who made less than $100,000 in 2019 If you did make staffing or payroll decreases between February 15, 2020 and April 2, 2020, you have until December 31, 2020 to restore full-time employees and/or salaries. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll Costs include Retirement Plan Contributions PPP funds can be used for payroll costs, including benefits such as health and retirement, until the earlier of 24 weeks from loan origination OR December 31, 2020. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll costs may include 401(k) employer contributions such as match and profit sharing. In addition, in its Interim FAQ Guidance, the Treasury Department clarified that these employer contributions are not counted towards the $100,000 employee compensation cap within the CARES Act definition of payroll costs. Considerations regarding 401(k) Contributions made with PPP Funds Although 401(k) plan contributions qualify as PPP payroll costs, employers should be aware that the timing of contribution allocations is important. Employee Elective Contributions made through paycheck deductions are eligible PPP payroll costs since they are compensation. Employer Matching Contributions are eligible PPP payroll costs. In addition, it’s possible (but not yet confirmed) that matching contributions that should have been allocated before the covered period but not paid out until during the covered period may be considered as (forgivable) payroll costs. However, it remains unclear as to whether matching contributions made after the covered period (including matching contributions typically made at the end of the plan year) will qualify under PPP. Employers may, therefore, want to consider ‘front-loading’ matching contributions by paying them out during the covered period to ensure that they are included as payroll costs and forgivable. (NOTE: The Flexibility Act extended the covered period from the earlier of 24 weeks from loan origination OR December 31, 2020.) We are waiting on additional guidance from the Treasury Department regarding employer contribution allocations. Employer Profit Sharing Contributions are often allocated at the end of the year. However, as noted with employer matching contributions, waiting until the end of the plan year to allocate may result in the contribution not being included as PPP payroll costs. In summary, any businesses receiving a PPP loan should be proactive in making employer contributions during the covered period. While uncertainties remain, the benefits of making employer contributions are clear: Increase in eligible (forgivable) payroll costs Meeting employer contribution obligations of the plan (per plan document) Providing additional retirement benefits to employees Are 401(k) Employer Contributions Made with PPP Funds Tax Deductible? IRS Notice 2020-32 states that PPP funds used for eligible expenses that would otherwise be deductible are not tax deductible if the payment of the expense results in loan forgiveness. In other words, if the company uses the funds to provide 401(k) employer contributions as an eligible expense and the loan is forgiven, those employer contributions would not be considered a deductible expense for the business because doing so would count as ‘double dipping’ on tax deductions. However, on May 5, 2020, the Senate introduced legislation (the Small Business Expenses Protection Act of 2020, S. 3612) that would overrule this notice to clarify that the expenses funded by the PPP are deductible. Betterment is keeping a very close eye on this and all legislation related to COVID-19 to provide our clients with the latest information. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
CARES Act FAQs for Employees
CARES Act FAQs for Employees More details about the special distributions and loan provisions that were made possible by the CARES Act. CARES Act FAQs for Employees Q: What is a Coronavirus-Related Distribution (CRD)? A: This is a new type of distribution available to 401(k) and other retirement plans that was created in 2020 to provide relief to those financially impacted by COVID-19. CRDs enabled eligible individuals to: Take a distribution of up to $100,000 in aggregate from 1/1/2020 - 12/30/2020; Avoid the usual 10% early withdrawal penalty; Elect to repay the distribution within 3 years from receipt of the distribution to avoid owing any taxes on the distribution. Q: Who was eligible to take this distribution? A: Individuals needed to meet one of the following criteria: Had been diagnosed with COVID-19 Spouse or dependent had been diagnosed with COVID-19 Had been experiencing financial hardship as a result COVID-19 including being quarantined, furloughed, laid-off, having to work reduced hours, or having lost childcare. Q: What was the maximum amount available to be taken as a CRD? A: Eligible individuals could take up to the lesser of 100% of their vested balance (amount owned outright) or $100,000 in aggregate across all tax-qualified defined contribution plans. This could be taken as a one-time distribution up to $100,000 or multiple distributions until 12/30/2020, as long as the aggregate amount does not exceed $100,000. Q: What are the tax implications of the CRD? A: Generally, any distributions taken prior to age 59½ are subject to a 10% early withdrawal penalty. The IRS has waived this 10% penalty for CRDs. Additionally, distributions are normally also subject to 20% federal tax withholding. You may have waived this withholding if you had elected to opt out on the CRD form. The distribution will be counted as taxable income unless you choose to repay the amount in full within three years from the date you receive the funds. Q: What are the tax implications if my CRD included any Roth funds? A: Roth 401(k)s distributions are not subject to any tax withholding if you are at least age 59½ and have contributed to your Roth account for at least 5 years. If you do not meet these criteria, the distribution is considered “unqualified,” and the earnings portion of the Roth 401(k) is subject to taxation. Q: How do I make repayments on the CRD and what happens if I don’t make the repayments in the given 3-year period? A: Here are two resources you may find useful: IRS Questions and Answers on CRDs The actual CARES Act bill, which includes a section on CRD repayments If you took a CRD and would like to repay it, you have the option to make an indirect rollover to an Individual Retirement Account (IRA)—at Betterment or elsewhere. (Note that Betterment does not accept indirect rollovers into 401(k) plans. However, if you make an indirect rollover to an IRA first, you can then rollover the funds to your 401(k) account if you wish.) To proceed with an indirect rollover at Betterment: Deposit the funds in a personal bank account linked to Betterment If you do not have an IRA with Betterment, you can start by creating an IRA account here. Log into your Betterment account and indicate the amount you’d like to rollover repay to a Betterment IRA via Deposit > Traditional IRA/Roth IRA > Indirect IRA Rollover. (Note: although Betterment only permits one indirect rollover per year, you have until 12/31/2023 to repay your CRD in full, so you need not pay the entire amount at once). You are responsible for documenting the CRD and its repayment when you file your taxes. If you decide to make an indirect rollover to an IRA, you will need to note this rollover of your employer-sponsored plan on Form 1040. If you took the CRD from a 401(k) with Betterment, we will provide you with a 1099-R. If you decide to complete an indirect rollover to a Betterment IRA, we will also provide a Form 5498 documenting the indirect rollover into the IRA. These two forms can be used as documentation that you took a CRD and made a repayment to an eligible retirement account. We will continue this practice while we wait on guidance from the IRS as it relates to whether individuals should also make this note with respect to CRDs. Q: Are CRDs eligible for rollover? A: No, CRDs were not able to be rolled over to another qualified account. However, if you decide to repay your CRD, it will go back into your 401(k) account and will be treated as a distribution eligible for rollover (direct trustee-to-trustee transfer). Q: Can I take a loan against my 401(k) Plan? A: If your 401(k) plan includes a loan provision, the usual available loan amount is the lesser of $50,000 or 50% of your vested account balance. Relaxed loan provisions that your plan may have adopted as part of the CARES Act expired in September 2020. Q: What was the maximum loan amount I could take under the relaxed loan provisions of the CARES Act? A: The CARES Act allows employees to take up to the lesser of 100% of the vested balance or $100,000. This is a temporary increase over the usual 50% of vested balance or $50,000. The increased loan limit is only applicable to loans initiated from March 27, 2020 to September 23, 2020 (180-day period). Q: What are the repayment rules? A: Employees with 401(k) loan repayments on new or existing loans that were due between March 27, 2020 and December 31, 2020 could have elected to delay them for one year. Interest (that you effectively pay back to yourself) continued to accrue and the term of the loan will be adjusted accordingly. Q: Was a different interest rate applied to my loan if I delayed my repayments for a year? A: The same interest rate continued to apply to any delayed repayments, but interest continued to accrue during this period which may increase the total loan repayment amount. To help ease the financial impact, the maturity date of the loan was able to be extended for up to one year. Q: How long were CRDs and relaxed loans available for? A: CRDs were available from January 1, 2020 to December 30, 2020. The relaxed loans were available until September 23, 2020. The one-year postponement of loan repayments was only applicable for repayments due between March 27, 2020 and December 31, 2020. Note that these provisions were not automatically available to all 401(k) plans; your employer had to decide to adopt them. This article is being provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that you are receiving this email solicitation as part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account. -
Guide to Meeting Your 401(k) Fiduciary Responsibilities
Guide to Meeting Your 401(k) Fiduciary Responsibilities To help your business avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities and manage them properly. If your company has or is considering, a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does it mean to you as a 401(k) plan sponsor? Simply put, being a fiduciary means that you’re obligated to act in the best interests of your 401(k) plan participants. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face serious legal and financial ramifications. To help you avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act in the best interests of employees who save in the plan and avoid conflicts of interest. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties and even shoulder some of the responsibility for you. Key fiduciary responsibilities Even if you’re a business owner with a small 401(k) plan, you still have fiduciary duties. By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. 401(k) fiduciary responsibility checklist As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when making decisions about plan operations. As a 401(k) fiduciary, you must follow five cornerstone rules: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, including collecting fee disclosures for investments and service providers, and comparing (or benchmarking) fees to ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Betterment’s fees are well below industry average, and we always tell you what they are so there are no surprises for you—and more money working harder for your employees. Plus, since we serve as both a 3(16) administrative fiduciary and 3(38) investment fiduciary, we can help limit your risk exposure so you can focus on running your business--not managing your plan. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. How to be the best 401(k) fiduciary you can be Now that you understand what a 401(k) fiduciary is, you may be wondering how to best fulfill your fiduciary responsibilities. Here are some tips: Pay reasonable fees—As you know, fees can really chip away at your participants’ account balances—and have a detrimental impact on their futures. So take care to ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. Your 401(k) provider should be able to assist you with the benchmarking process. Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days.For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to guide you through the process.It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as safe harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Follow the plan document—It’s important to know your plan document. In fact, the IRS mandates that 401(k) plans operate in accordance with the terms of its written document to maintain its tax-favored status and prevent a breach of fiduciary duty.Make a mistake? The IRS considers the issue an “operational defect,” and your 401(k) plan can be disqualified for not fixing the problem in a timely manner. However, the IRS offers a handy 401(k) Plan Fix-It Guide to help you resolve any issues that crop up. Select prudent investments—Unfortunately, there can be many hidden fees buried in plan investments, so it’s critical to be vigilant about those you select. In addition to fee considerations, you must also think about whether they meet your plan’s investment objectives. Wondering which investments you should choose? Betterment can help.In fact, most companies hire one or more outside experts (such as an investment advisor, investment manager, or third party administrator) to help them manage their fiduciary responsibilities. Get help shouldering your fiduciary responsibilities When it comes to managing your fiduciary responsibilities, you don’t have to go it alone. However, the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring your plan’s investment professionals and administrators. How much support is right for you? For most employers, day-to-day business responsibilities leave little time for extensive investment research, analysis, and fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties or even plan administration responsibilities. Take a look at the chart below to see the different fiduciary roles—and the implications they have for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibility Betterment can help When you appoint an ERISA 3(38) investment manager like Betterment, you fully delegate responsibility for selecting and monitoring plan investments to the investment manager. That means less work for you and your staff, so you can focus on your business. In addition to assuming fiduciary responsibility for your investment options, Betterment offers: Consultative plan sponsor support—As a total 401(k) solution, we are your full-service partner providing everything from fiduciary services to plan design consulting to ensure your 401(k) is fully optimized. Personalized employee guidance—Our action-oriented approach to financial wellness enables your employees to make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. Plus, we link employees’ outside investments, savings accounts, IRAs—even spousal/partner assets—to help them see the big picture. And we do it all for fees that are well below industry average. -
How a Competitive Compensation Package Can Attract Top Talent
How a Competitive Compensation Package Can Attract Top Talent As an employer, you know that there’s a lot more to keeping employees happy. Let’s review the five most important aspects of competitive compensation packages. Offering an endless supply of snacks. Giving employees their birthday as a paid holiday. Turning the conference room into a massage room. Every day, there’s a new perk popping up at companies across the United States. As an employer, you know that there’s a lot more to keeping employees happy than beer on tap and dogs at work. But what really matters to employees? How can the right benefits help you attract and retain top talent? And what does a competitive compensation strategy really look like? Let’s start by reviewing the five most important aspects of competitive compensation packages. 1. Money talks, salary matters The million-dollar question every prospective employee wants to ask is: “How much will I get paid?” There’s no question about it—the value of your compensation packages will often determine the caliber of employee you’re able to attract and retain. According to the Society for Human Resource Management (SHRM), salary ranges help employers control their payroll expenses and ensure pay equity among their staff members. Before you decide if you’re going to set salaries at, above, or below the market range, think about your company’s compensation philosophy. For example, if you’re trying to become a market leader, you may want to pay employees more than your competitors. Wondering what your competitive salary ranges are? Some research is in order. Based on geographic location, analyze the salary ranges for all of your company’s jobs. Beyond base pay, you’ll also want to consider bonuses, commissions, and equity. Need a little help? Websites like glassdoor.com can offer a peek inside salaries at other companies, or you could consider hiring a vendor to analyze and assist with pay scales. Want to compete? Pay at or above the market range (or have other generous benefits that make up the difference). 2. A healthy attitude about health insurance An important part of employees’ total compensation is health insurance. While some employers offer coverage to employees only, most employers extend the option of coverage to employees’ immediate family members. In addition, some employers also offer dental insurance, vision insurance, short-term and long-term disability, life insurance, and pet insurance. According to research by the Kaiser Family Foundation, the average cost of employer-sponsored health insurance in terms of annual premiums was $7,188 for single coverage and $20,576 for family coverage. Typically, the employee and the employer each pay a portion of the premium. However, very generous employers may cover 100% of the premium cost of a basic plan and give employees the option to select a higher-level plan (and just pay the cost difference). Want to compete? At a minimum, provide employees with health care, vision, and dental insurance and cover some or all of the premium. 3. Time to rest, recharge, and recover After asking about salary, most employees want to know about paid time off (PTO). Typically, companies handle PTO in one of three ways: Single PTO balance—A total number of days (for example, 14 days) that employees can use at their discretion when they’re sick, want to take a vacation, or just want time for themselves. If employees don’t take all their time off, some companies allow them to roll over days to the next year and even cash them out when they leave the company. Separate PTO balances for sick, vacation, and personal—Separate buckets of PTO (for example, 5 sick days, 10 vacation days, and 2 personal days) that employees can use for that specific purpose. Like with the single PTO balance, you’ll need to figure out your roll-over and cash-out policy. Unlimited PTO—The newest trend in PTO, many companies are allowing employees to take as many days off as they want (and for whatever reason) as long as they’re meeting their performance goals. In addition, many employers provide the typical paid holidays such as Thanksgiving, Memorial Day, and Labor Day. When it comes to managing PTO benefits, you’ll also need to comply with federal, state, and local laws (including regulations on family and medical leave (FMLA), hourly wage minimums, and military leave). However, just offering the basics may not be enough to entice prospective employees. For example, FMLA allows eligible employees to take unpaid, job-protected maternity leave for 12 weeks. To better serve their employees, many companies go above and beyond this standard by offering paid maternity leave (and increasingly, paid paternity leave) for several weeks or even months. Want to compete? Do a market analysis to ensure you offer a competitive leave policy—and then sweeten the pot with an extra perk such as a floating holiday. 4. Future focused, retirement ready After their day-to-day needs are met, employees start looking to the future. As an employer, you can help them achieve the retirement they envision by offering a retirement plan. The most popular type of workplace retirement program today is the 401(k) plan. On the fence about offering a 401(k) plan as part of your benefits package? Consider these top three reasons to start one today: Attract (and retain) employees—In the battle for top talent, a competitive 401(k) plan with perks like matching contributions can entice jobseekers to join your company. (Plus, a company match may cost less than you think.) Help your employees build a brighter future—Studies show that financial stress can have a damaging impact on business output, lead to higher employee turnover, and increase recruiting costs. Help mitigate that stress by offering a 401(k) plan that allows your employees to save for their future with confidence. Enjoy valuable tax advantages—Employer matching, profit sharing, and safe harbor contributions are tax deductible and bypass payroll taxes! Plus, small businesses can receive valuable tax credits to help offset the costs of your 401(k) plan. Want to compete? Offer a 401(k) plan with a company matching contribution. 67% of employees surveyed by Betterment said that a good 401(k) was an important factor when evaluating a job offer. 5. Take stock of employee stock options For start-ups and other emerging companies, employee stock options are also a popular form of compensation. Employees may even join the company for a lower-than-usual salary in exchange for a generous package of stock options. So what exactly is a stock option? Well, it’s a contract that gives employees the right to buy (or “exercise”) a set number of shares of the company’s stock at a pre-set price. However, employees must buy the shares within a certain time period—and after it expires, they no longer have the option to do so. If the company prospers, employees who have exercised their stock options could become very wealthy. By giving employees stock options, you also give them a good reason to be invested (literally) in their company’s success. Perks, perks and more perks So what about the free beer and nap rooms dreamed up by HR professionals? According to Forbes Magazine’s Forbes Coaches Council some of those benefit offerings are nothing more than a gimmick. In fact, they may be perceived negatively by employees. For example, free food, booze, and places to crash could be seen as a contrived way to hurt employees’ work-life balance by incentivizing them to work longer hours. However, there may be some extra perks—like remote working arrangements or student loan repayments—that could resonate well with your employees. Wondering which extra compensation and benefits perks could work? Start the conversation with your staff. From one-on-one meetings to employee surveys, there are many ways to take the pulse of your workforce. So, what will it all cost? As you can imagine, total compensation varies dramatically across geographic location, industry, and role. You can dig deeper into employee benefit benchmarking data by partnering with a compensation company to develop a better understanding of your local and regional competition. With this data, you can examine compensation at a more granular level to understand if your company is on target—or may need a compensation adjustment. After all, more competitive compensation means more qualified employees—and potentially more business success. Betterment can help In the competition for top talent, every single benefit matters. For jobseekers, a strong 401(k) plan can make all the difference. So if you want to enhance your total compensation package, consider offering a 401(k) plan or adding a company match to your existing plan. While some employee benefits are very costly, the good news is that offering your employees a quality 401(k) plan may cost less than you think. At Betterment, our fees are a fraction of the cost of most providers. As your full-service partner, we can help design your ideal 401(k) plan with employee-friendly benefits like company matching contributions and automatic enrollment. -
Saver’s Credit: Understanding the Retirement Savings Contribution Credit
Saver’s Credit: Understanding the Retirement Savings Contribution Credit The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan. Here’s how to answer the most frequently asked questions. What if your employees could receive a tax credit just for saving for retirement? It sounds too good to be true, but it actually is real! It’s called the Retirement Savings Contribution Credit, more commonly known as the Saver’s Credit. The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan; however, they may not even know about it! In fact, only about 12% of eligible taxpayers claim this credit! Want to get the word out about the Saver’s Credit? Here’s how to answer your employees’ most frequently asked questions. 1. What is the Retirement Savings Contribution Credit or Saver’s Credit? The Saver’s Credit gives a tax break to low- and moderate-income taxpayers who are saving for retirement. If you qualify for this special credit, it could reduce (or even eliminate) your income tax bill. That’s because it’s not a tax deduction, it’s a tax credit. Wondering what the difference is between the two? Here’s how it works: A tax deduction reduces your taxable income, and you pay taxes on the remaining taxable income. A tax credit directly reduces the amount of taxes you owe. That means it’s far more valuable than simply a tax deduction! The Saver’s Credit is non-refundable, which means it can only be subtracted from your tax liability—and potentially zero out your income tax bill—but it can’t provide you with extra money from the US Treasury. So if you owe $900 but you have a $1,000 Saver’s Credit, you won’t have to pay a dime to Uncle Sam (but the other $100 tax credit is lost). Plus, this special credit is above and beyond any tax deductions you may receive by making a 401(k) or Traditional IRA contribution! 2. Am I eligible for the credit? You're eligible for the credit if you: Are age 18 or older Are not a full-time student Are not claimed as a dependent on another person’s return Made before-tax or after-tax retirement contributions to an eligible plan Met the Saver’s Credit adjusted gross income (AGI) qualifications (For the 2020 tax year, it’s less than $65,000 if you file “married filing jointly,” less than $48,750 if you file “head of household,” and less than $32,500 if you file “single,” “married filing separately,” or “qualifying widow(er).”) 3. Which retirement accounts are eligible for the Saver’s Credit? You can potentially claim a Saver’s Credit for your eligible contributions if you contribute to one (or more) of the following popular plans: 401(k) IRA (Traditional IRA or Roth IRA) SIMPLE IRA 403(b) 457 plan For additional details on eligible account types, refer to the IRS website. What’s not eligible? If you received any employer contributions (such as a company match), you can’t claim those contributions for the credit. Rollover contributions (money that you transferred from another retirement plan) also aren’t eligible for the Saver’s Credit. 4. How much is the credit worth? The credit amount is calculated on a sliding scale. Depending upon your income (as reported on your Form 1040 series return), you’ll receive a tax credit of 50%, 20% or 10% of your qualified retirement savings contributions. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), which means your maximum credit is $1,000 ($2,000 if married filing jointly). As you’ll see in the chart below, the income brackets vary depending upon your tax filing status: Married filing jointly, head of household, single, married filing separately, or qualifying widow(er). Review the following charts for information on the specific income brackets and credits for tax year 2019 and 2020. 2019 Savers Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution AGI not more than $38,500 AGI not more than $28,875 AGI not more than $19,250 20% of your contribution $38,501 - $41,500 $28,876 - $31,125 $19,251 - $20,750 10% of your contribution $41,501 - $64,000 $31,126 - $48,000 $20,751 - $32,000 0% of your contribution more than $64,000 more than $48,000 more than $32,000 2020 Saver’s Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500 20% of your contribution $39,001 - $42,500 $29,250 - $31,875 $19,501 - $21,250 10% of your contribution $42,501 - $65,000 $31,876 - $48,750 $21,251 - $32,500 0% of your contribution more than $65,000 more than $48,750 more than $32,500 *Single, married filing separately, or qualifying widow(er) 5. Can you give me an example of how the Saver’s Credit works in the real world? Take these scenarios for example: Sam and Jil Sam and Jill have been married for 10 years. Sam was unemployed in 2020, and Jill earned $57,000 from her job at the bank. Jill contributed $2,000 to her 401(k) plan in 2020. After deducting her 401(k) contribution, their AGI on their joint return was $55,000. According to the 2020 Saver’s Credit chart, couples who file as “married filing jointly” and have an AGI between $42,501 and $65,000, may claim a tax credit, which is equal to 10% of their retirement contribution. Therefore, Sam and Jill may claim a 10% Saver’s Credit—$200—for Jill’s $2,000 401(k) plan contribution. Monica A recent college grad, Monica earned $32,000 in 2020. To help save for her future, she contributed $2,000 to her 401(k). After deducting her contribution, her AGI on her tax return was $30,000. According to the 2020 Saver’s Credit chart, a person who files as “single” and has an AGI between $21,251 and $32,500 may claim a tax credit that is equal to 10% of their retirement contribution. Therefore, Monica may claim a 10% Saver’s Credit—$200—for her $2,000 401(k) contribution. 6. I think I’m eligible for the Saver’s Credit. How do I claim it? To claim the credit, use tax Form 8880, “Credit for Qualified Retirement Savings Contributions.” If you have any questions about how to claim this credit, talk to your tax accountant. Subhead: Betterment offers the support your employees need As an employer, you can help your employees pursue their retirement goals—and Betterment can help. As a full-service plan provider, Betterment will do the heavy lifting for you from onboarding to ongoing administration. We’re also here for your employees every step of the way. Whether they’re wondering if they’re eligible for the Saver’s Credit or debating how to invest, we offer personalized advice to help them make smarter decisions. Plus, we do it all for a fraction of the cost of most providers. -
CARES Act Overview for 401(k) Plans
CARES Act Overview for 401(k) Plans The CARES Act provides some temporary relief for 401(k) plan sponsors and their participants. Here's everything you need to know about provisions specific to plans. The CARES Act, a $2 trillion economic stimulus package signed into law on March 27 after unusually speedy Congressional approval, provides some temporary relief for retirement plan sponsors and their participants. Below is a summary of provisions specific to 401(k) plans, although there are many details yet to be worked through. Eligibility: In order to be eligible for the Coronavirus Related Distributions (CRDs) and relaxed loan provisions, participants will be required to certify that they meet one of the following criteria: They have contracted COVID19 themselves Their spouse or dependent has contracted COVID19 They have lost a job, been furloughed or otherwise suffered a heavy financial burden because of COVID19 (including loss of childcare) CRDs and the relaxed loan provisions are optional plan features. Plan sponsors who decide to make these features available to their participants should inform their providers, who can offer guidance, additional details and assistance in communicating changes to your employees. Although plans will need to be amended to include these special features, you have until the end of 2022 to do so. Betterment for Business has been in touch with clients regarding the CARES Act and is waiving any related plan amendment fees. Coronavirus Related Distribution (CRD) Eligible participants (see above) can take up to $100,000 from employer-sponsored retirement plans and IRAs without being subject to the normal 10% early distribution penalty or the 20% mandatory tax withholding. In addition, although the CRD will be treated as regular income, it can be spread over three years for tax purposes, and the distribution can be repaid---without being subject to the regular contribution cap---within three years to avoid taxation. CRDs are available for the entire 2020 calendar year, so even 2020 distributions made prior to the enactment of the CARES Act may be treated as a CRD. Relaxed Loan Provisions The available 401(k) loan amount has been increased to the lesser of 100% of the vested balance (up from 50%) or $100,000 (up from $50,000). In addition, participants with loan repayments due between 3/27/2020 and 12/31/2020 can elect to delay them for 1 year. Interest will continue to accrue, but the term of the loan will be extended accordingly. Required Minimum Distribution (RMD) Waiver By law, participants turning 72 are required to start taking RMDs based on previous calendar year-end market values. (The RMD age was increased in 2020 from 70 ½.) So 2019/2020 RMDs based on 12/31/18 and 12/31/2019 market values would have forced individuals to sell investments at drastically reduced prices. The CARES Act waives all RMDs for 2020, including first-time 2019 RMDs, which individuals may have been waiting until April 1, 2020 to make. Any RMDs already taken in 2020 (including 2019 RMDs paid in 2020) are eligible for a 60-day indirect rollover (or 3 year repayment under CRD rules) and won’t be considered to have been taken as a distribution. If you have more questions about COVID-19 and the CARES Act, please see our FAQs. -
401(k) Plans for Small Businesses
401(k) Plans for Small Businesses When deciding on employee benefits, more employers are recognizing the importance of financial wellness and how it attracts and retains top talent. Health insurance. Bonuses. Cold brew on tap. Retirement plans. Free lunch Fridays. Ping pong tables. Nap pods. When it comes to employee benefits, there’s a lot to consider. Some perks clearly outrank others, but when deciding what to offer, it can be hard to determine which are right for your small business. But these days, more employers are recognizing the importance of helping their employees save for their future. Not only does having a savings plan make a company more attractive to candidates in today’s tight market, but there is a larger societal issue at play. Approximately 40% of Americans do not have access to a workplace savings plan, meaning they will likely not have enough to retire comfortably. In light of this, many states have passed legislation mandating that employers offer a retirement savings plan such as a 401k plan. (See more later in this article about the state plans.) And don’t forget about your own future! As a small business owner, you may believe that the profits you earn will help you live comfortably in retirement. However, you know that life can change in an instant. Setting aside money in a convenient, tax-advantaged 401(k) plan, can help ensure you’ll live the life you envision. So you may be asking yourself: “Should my small business offer a 401(k) plan?” Many times small business owners believe a 401(k) is too expensive and time-consuming, but that couldn’t be further from the truth. 5 Common Myths about 401(k)s for Small Businesses Let’s take a moment to dispel some of the most common misconceptions about small business 401(k) plans: “It’s Too Expensive!” Traditionally, the price for a 401(k) plan could be quite high and complex. However, times have changed. Innovative providers like Betterment now offer comprehensive plan solutions at costs that are well below the industry average. Plus, small businesses may be eligible for up to $16,500 in valuable tax credits (see more below). “It’s Too Time-Consuming!” Managing every detail of your 401(k) plan by yourself could be extremely onerous, but choosing an experienced partner who can handle everything from plan design to compliance testing means that you can focus on running your business—not worrying about your 401(k) plan. “I’m Afraid of the Legal Ramifications!” The legal responsibilities are real, but many providers assume various levels of investment and/or administrative fiduciary responsibility that dramatically limit your risk exposure. “I’m Not Sure My Employees Will Participate!” Participation is more popular than you may think! In fact, according to the latest survey from the Plan Sponsor Council of America, more than 84.9% of employees are contributing to their 401(k)s. Plus, plan enhancements like automatic enrollment have helped drive participation by combating employee inertia.1 And lower-salaried employees may be entitled to as much as $2,000 thanks to the little-known Saver’s Credit. “We Can’t Afford to Offer a Match!” Matching and profit-sharing contributions are totally optional. Even if your company can’t afford to kick in extra contributions, you can still offer your employees the convenience and tax savings of a 401(k) plan. And if you do decide to offer an employer match in the future, you can deduct those contributions on your taxes! Three Benefits Employers Get From Offering a 401(k) You probably know a 401(k) plan is great for employees, but did you know it’s great for employers, too? Here are the top three ways small businesses benefit by offering a 401(k) plan: Attract and retain talented employees: According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was very important or important in their evaluation of a job offer. Plus, you can consider perks like an employer match to make the plan even more compelling for current and prospective employees. Improve employee satisfaction (and productivity): Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. But a 401(k) combined with financial guidance can go a long way toward helping your employees reduce their financial stress. Enjoy valuable tax advantages: To help motivate employers with fewer than 100 employees to offer a retirement plan, the IRS grants some valuable tax benefits. Some of these were added or increased as part of the recent passage of the SECURE Act in December 2019. A tax credit of up to $15,000 over three years to help defray 401(k) start-up costs A tax credit of up to $1,500 over three years for adding automatic enrollment Tax deductions for employer matching or profit-sharing contributions Want to know more about these tax advantages? Talk to your tax advisor or 401(k) plan provider. The 401(k) Costs to Consider Historically, 401(k)s fee structures have been notoriously complex, often with embedded fees to compensate the many players involved. With renewed focus on fees and the entrance of newer 401(k) providers, fees today can be lower and more transparent. Fees are usually shared between employees and employers, so it’s important to look at how fees are assessed and their impact. Fees typically include an annual administrative fee, a per employee fee, and investment management and/or fund fees, usually expressed as a percentage of assets and deducted from employee accounts. Although it can be tempting to choose the provider with the lowest fee, it’s important to understand and evaluate the value provided to you and your employees. Making a wrong decision could mean you will be looking for a new 401(k) provider again in the very near future, which is a distraction to your business. What About the State Programs? Several states, including California, Illinois, Oregon, and others, have passed legislation mandating that employers offer a savings program to their employees. States differ in terms of the size of companies impacted by the mandate, but this trend reflects a growing concern among state governments that more needs to be done to address the issue. The state programs represent potential alternatives to a 401(k); however, they differ from 401(k)s in several important ways: Lower Contribution Limits Because the state programs are Roth IRAs, the maximum allowable contribution limits are much lower than for 401(k)s. For instance, annual contribution limits for those under 50 are just $6,000 for the state programs versus $19,500 for 401(k)s). For those 50 and over, the limits are $7,000 and $25,000 respectively. Lower Income Limits Because Roth IRAs are governed by federal guidelines on income limits, business owners and highly compensated may be restricted from how much they can save (or be prohibited from saving anything at all). To be eligible, married filers can have a joint income of no more than $206,000 and single filers can have an income of no more than $139,000. No Flexibility in Terms of Features and Investment Options A 401(k) can be designed to address the unique needs of a given employee demographic or industry, thereby enabling employers to differentiate their benefits package to attract and retain talent. This flexibility includes plan features like loans and employer contributions, neither of which is part of the state IRA programs. No Employer Tax Credits the recently-passed SECURE Act increased the attractiveness of 401(k)s, thanks to increased tax credits available to small employers. The maximum tax credit is $16,500 over 3 years. No such tax credit is available for companies that adopt the state-mandated plans. State-mandated Roth IRA programs are a step in the right direction, but you should consider all of your options when it comes to offering your employees a benefit that will make a real difference for their future. Given their added flexibility and the ability for employees (and business owners) to save more, 401(k)s have the potential to bring greater value to both your employees and your organization. 3 Steps to Getting your 401(k) Up and Running If you’re considering offering a 401(k) plan to your employees, you may be wondering how to get started. Well, the process is relatively simple: First, select your 401(k) plan provider. How do you figure out who to choose? Be sure to ask detailed questions about their onboarding process, fees, investments, customer support, employee experience and more. Second, set up your plan. If you elect an experienced 401(k) provider, the onboarding process should be easy. You’ll likely have to fill out some paperwork, connect your payroll, and complete a few other straightforward tasks. Third, encourage your employees to start saving as soon and as much as they can. By communicating with your employees, you can help them understand the benefits of having a retirement account. Plus, if you elect automatic enrollment, it’s even easier to help your employees save for their financial future. Deciding to offer a 401(k) plan is an important decision and one that has the potential to impact the lives of your employees in a significant way. We encourage all small business owners to understand the benefits of starting up a 401(k) for their employees and to be a part of helping more Americans save for their future. 1.PSCA: 401(k) participation up, as well as contributions The information provided is education only and is not investment or tax advice. -
Help Employees Avoid Early 401(k) Withdrawal Penalties
Help Employees Avoid Early 401(k) Withdrawal Penalties As an employer, you'll need to explain the risks of early 401(k) withdrawals to your employees. Here’s a guide with answers to common withdrawal questions. In an ideal world, employees would diligently save through their 401(k) plan and only withdraw their money in retirement. In reality, financial needs—like paying for college or buying a new home—may tempt employees to raid their retirement savings. As an employer, you can clearly explain the risks of early withdrawals so your employees can make educated decisions about their future. Here’s a quick guide with answers to frequently asked questions about 401(k) withdrawals. Frequently Asked Questions Can I withdraw money from my 401(k) plan before retirement? If you’re still at your job, you typically may not withdraw money from your 401(k) account unless your plan allows hardship withdrawals to pay for immediate and serious financial needs. (Some plans do allow for other in-service distributions, but these are typically restricted to employees over age 59-½. In any case, the point is clear: retirement savings are meant for, well, retirement). However, if you leave your job, you can withdraw money from your 401(k) account, but it may cost you. That’s because your 401(k) plan is designed to help you save for a more comfortable retirement, and if you use it for another purpose, the IRS will penalize you. In fact, you’ll typically pay a 10% early withdrawal penalty if you withdraw money before reaching age 59½. Plus, you’ll pay income taxes on the distribution. If you invested in a Traditional 401(k), you’ll pay taxes on the full amount, and if you invested in a Roth 401(k), you’ll pay taxes on any earnings. Here’s how it works. Let’s imagine that you contributed $5,000 to your 401(k) account, and when it grows to $7,500, you decide to withdraw the full amount to pay a hospital bill. If you invested in a Traditional 401(k)… Your entire $7,500 withdrawal will be subject to taxes in addition to a $750 (10%) 401(k) withdrawal penalty if you’re younger than age 59 ½. If you invested in a Roth 401(k)… You would only pay taxes on the $2,500 in earnings—not on the $5,000 in contributions—however, you would still need to pay the $750 penalty if you’re younger than age 59 ½. Because an early withdrawal from your 401(k) plan could severely derail your retirement, you should only consider it as your absolute last resort. What are the long-term financial consequences of an early 401(k) withdrawal? Consider this: If you were in the 24% tax bracket, a $7,500 early withdrawal from a Traditional 401(k) will cost you $1,800 in taxes and $750 in penalties for a total of $2,550, leaving you with just $4,950. But that’s just the beginning of the price you may pay because when you withdraw funds early, you also miss out on the power of compounding, which is when your earnings accumulate to generate even more earnings over time. In this case, if you kept that $7,500 invested for 35 years, you could see it grow to $56,218!* *Projected balances estimated using Betterment's goal projection methodology. If you leave your company and are tempted to “cash out” your 401(k) plan, consider rolling it into an IRA or your new employer’s 401(k) plan instead. By doing so, you’ll benefit from tax-deferred or tax-exempt compounding and set yourself up for a brighter future. Are there any exceptions to the 10% early 401(k) withdrawal penalty? Yes, the IRS does allow some exceptions to the 10% early withdrawal penalty. These penalty-free withdrawals include: Rollover—If you roll over your money to another eligible retirement plan within 60 days. (Beware the “indirect” rollover, which may complicate issues and result in additional penalties if you’re not careful.) Death—If your beneficiaries receive a distribution from your 401(k) plan after your death Disability—If you become severely disabled and can show documentation of that fact from a physician Medical expenses—If your early 401(k) withdrawal is to pay for medical expenses not reimbursed by health insurance that exceed 10% of your adjusted gross income Qualified Domestic Relations Order (QDRO)—If distributions are to an alternate payee such as a child or former spouse following a divorce or separation Active duty military—If you are a reservist who is called to active duty for a period longer than 179 days or for an indefinite time Separation from service—If you are laid off, fired, or quit between age 55 and 59 ½ (However, this 10% penalty exemption only applies to assets in your most recent employer’s 401(k), or any other employer you left at/after age 55. If you withdraw assets from old 401(k)s with former employers, you’ll still have to pay the penalty.) Substantially Equal Periodic Payments (SEPP)—If you plan your withdrawals to meet SEPP requirements for a period of five years or until you turn 59½, whichever comes later What is a hardship withdrawal? If you need to take a withdrawal from your 401(k) plan account while you’re still with your employer, you may be eligible to take a hardship withdrawal if your plan offers it. The amount of money you can withdraw must be limited to the size of the need, and you will need to document and maintain proof of the need (even if you aren’t asked to provide proof when you request the withdrawal). For example, some plans offer hardship withdrawals to pay for: Qualified medical expenses Costs related to purchase of principal residence (for employee only, excludes mortgage payments) Tuition and education expenses Funeral expenses Costs to repair damage to principal house Costs to prevent eviction or foreclosure of primary residence Disaster relief Like any early withdrawal, you will be taxed, and IRS rules will govern whether you pay the 10% 401(k) withdrawal penalty. Consult your 401(k) plan’s rules for guidance on whether hardship withdrawals are available. How do 401(k) loans work? Some plans allow you to take a loan from your 401(k) account, but before you do, think about these important considerations: Most companies only allow loans to current employees. That means it’s unlikely that you’ll be able to take a loan from an old plan; however, you can roll your old balance into your current 401(k) plan and then take a loan. You may only borrow up to $50,000 or 50% of your vested account balance (the amount that belongs to you, which does not include any company matching contributions that have not yet vested). You must repay the loan through after-tax payroll deductions. Typically, the repayment term is five years or less. However, if you are using the money to purchase your principal residence, the repayment period may be longer. You pay yourself interest. Your 401(k) plan’s rules will determine the formula (for example, one point above prime). However, the interest may not be enough to make up for earnings you would have generated if you didn’t take a loan. Many plans limit you to having only one loan at a time, in which case you must repay your outstanding loan in full before taking another. If you leave your job while you have an outstanding loan, you likely need to repay it immediately. If you don’t, it will be categorized as an early distribution and you’ll owe income taxes and the 10% 401(k) withdrawal penalty. What are some good alternatives to taking a withdrawal or loan from my 401(k) plan account? Before you take an early withdrawal from your 401(k) plan account—and potentially do something you might regret—consider another option, for example: Alter your lifestyle—Whether you cut the cord on your cable subscription or transfer your credit card balance to a lower interest card, simple changes can save you money. Work a side hustle—Consider turning a hobby like baking or coaching tennis into a paying gig or think about subletting an extra room in your home. Look at other loan sources—If you have a significant amount of equity in your home, a home equity loan may be a cost-effective way to free up the money you need. However, be sure you understand the closing costs and other fees and are comfortable with the idea of putting your home at risk. Also know that certain early withdrawal penalties, like those for principal residence purchase or higher education expenses, are waived when withdrawn from an IRA, but not when withdrawn from a 401(k). If you need to dip into retirement accounts, a financial advisor will be able to help you understand which accounts to draw from and in which order to help you avoid or minimize unwanted taxes and penalties. Are there any other withdrawal penalties I should know about? In addition to the early withdrawal penalty, the IRS also assesses a penalty if you begin taking distributions too late. Specifically, the IRS requires that you begin taking withdrawals—known as required minimum distributions—from your 401(k), IRA, and other qualified retirement accounts once you reach age 72 (prior to January 1, 2020, these distributions were required once you reached age 70-½). This requirement exists because the government wants to ensure they receive the income tax owed on the money you have saved tax-free. It’s important to note that if you've invested in a Roth 401(k), you must take required minimum distributions; however, if you roll your money into a Roth IRA, you can avoid this requirement. How You Can Help Now that you have a better idea of how to answer your employees’ questions about 401(k) withdrawals, it’s time to be proactive. Instead of waiting for employees to come to you, consider hosting a meeting or sending an email to remind your employees of the ramifications of taking a plan loan or withdrawal. Wondering how to educate your employees about the plan? Betterment can help. As a full-service partner, we provide everything from compliance testing to communication support to ensure your 401(k) is effective as possible—and your employees have the support they need to succeed. Better for your employees. Better for your business. Betterment for Business. -
Retirement Security Case Study from a Cybersecurity Firm
Retirement Security Case Study from a Cybersecurity Firm Learn how WatchGuard, a cutting-edge cybersecurity company, created over $55 million in potential retirement wealth for its employees with a Betterment 401(k). For over 20 years, WatchGuard has been a pioneer in developing cutting-edge cybersecurity technology for small to mid-sized businesses around the globe and delivering it as an easy-to-deploy and easy-to-manage solution. So it was no coincidence that the company sought to deliver retirement security to its employees packaged in a user-friendly solution. WatchGuard first introduced a 401(k) plan in 1998, and prior to choosing a new provider, the company had more than 355 employees and over $27 million in plan assets. The head of HR felt it was imperative to turn the 19-year old plan into an effective part of WatchGuard’s employee benefits package. Not only did the head of HR want to make the plan easier to participate in, but he also wanted to encourage better investing behavior for his employees. The company’s internal evaluation revealed three major opportunities: WatchGuard could encourage more employees to save: The plan participation rate of 64%1 was suboptimal, especially given that the employee base is comprised of well-educated technologists. Participants could stand to save more: Of those participating in the plan, the median deferral rate was 7.5%, which only marginally exceeds the national average of 6-7%.2 More importantly, the head of HR wanted WatchGuard to aim higher than the national average. Participants could likely reach better investing behavior: Navigating a 22 fund line-up with little to no financial advice, 60.3% of employee accounts were invested at improper risk levels given their personal demographics.3 As you’ll see in this case study, WatchGuard effectively improved on all three fronts, leading to better retirement security for its employees. After searching for a 401(k) provider offering managed accounts that operate as a qualified diversified investment alternative (QDIA), re-enrolling all non-participating employees, and adding automatic enrollment for new hires, the head of HR supervised the following results for WatchGuard’s new 401(k) plan. The new 401(k) plan started on February 28, 2017, and the results were analyzed on August 23, 2017. The numbers below were provided by the plan based on their transition. More employees saving: A 51.4% increase in the number of employees saving for retirement, resulting in a 92.9% participation rate and $42,199,741 in potential retirement wealth created within the plan. Employees saving more: An increase in median deferral rate to 10% among employees who were already contributing and $8,193,044 in potential retirement wealth created. Better investing behavior: An increase from 40% to 91% of employees with appropriate risk levels4—helping participants improve their investing behavior and generating $5,287,892 more in potential retirement wealth created. In the following sections, we’ll describe in detail how WatchGuard’s new 401(k) plan achieved such positive results. Re-enrollment helped more employees save Behavioral nudges are effective in encouraging employees to take advantage of the financial benefits of a 401(k).5 Prior to developing the new plan, Watchguard reported that only 64% of employees contributed to their 401(k) plan. As part of the transition to a new provider in 2017, the company re-enrolled all non-participating employees and added automatic enrollment for new hires, ensuring that all employees were equipped to contribute to their 401(k) account (unless they intentionally chose to opt out). After re-enrollment, 92.9% of employees were contributing to the plan, a 51.4% increase in participation across the well-educated, technologist employee base. This meant that 89 employees who were not previously saving for retirement using their 401(k) were now making regular contributions to their plan. Forward-looking analysis6 of these 89 employees’ savings predicted that a total of $42,199,741 of new potential wealth would be created in aggregate within the plan. Re-enrollment and a company match encouraged employees to save more WatchGuard saw a significant opportunity to increase the average employee deferral rate, meaning that more of each employee’s paycheck would be allocated to the 401(k) plan. Since WatchGuard’s plan offered a generous company match, the head of HR felt strongly that some employees were losing out on the full benefit of having a 401(k) plan. Out of 179 employees who were saving before the plan switch and also saving after, 32 participants elected a higher contribution rate. Among this group, the median deferral rate was 7.5% prior to implementing the new plan, and afterward, the median rate increased by 33.3% to a rate of 10%. What drove this group of people to increase their deferral rate? Watchguard expected that the aggressive company match of 25% on contributions up to $10,000 was one motivator, but since the company match pre-dated the new plan, the other likely factor was the company’s choice to implement re-enrollment for all employees saving less than 6% in the previous plan. When participants face re-enrollment, they are primed to reconsider their current retirement savings and can make a positive choice to defer more to their 401(k). We can also show the impact of higher deferral rates on the aggregate effect on WatchGuard’s plan. Across all 32 employees who increased their deferral rate after re-enrolling in the new plan, a total of $8,193,044 million in potential wealth was expected to be generated.6 Using a managed account as a QDIA developed better investing behavior When evaluating 401(k) providers, the head of HR was particularly concerned about the confusion new participants face when navigating a conventional 22-fund line-up within a 401(k) plan.7 In his view, there was already enough stress in just starting a new job; employees should not have to make important investing selections without guidance. In consulting financial experts, WatchGuard’s head of HR learned that more than 60% of participant accounts were improperly allocated across the funds available,8 given their age and the remainder of time until retirement—assuming a retirement age of 65. When transitioning to a new provider, WatchGuard introduced a managed account for each employee that qualifies as a QDIA. This approach defaults each employee into an age-appropriate, globally diversified portfolio. After implementation, WatchGuard saw that the vast majority of employees seemed to welcome and adhere to personalized portfolio advice over selecting their own investments. Prior to the new plan, only 40% of participants had their savings allocated with appropriate exposure to risk. After introducing a QDIA in the form of managed accounts, 91% of WatchGuard’s participants relied on investment advice that properly allocated their savings to an appropriate level of risk. Before: Employee 401(k) Account Deviation from Target Allocation3 After: Employee 401(k) Account Deviation from Target Allocation3 Companies with an authentic concern for employee retirement success and a desire to clearly position their 401(k) plan as a valuable benefit to employees should aim to execute a 401(k) plan with as much as thoughtfulness as WatchGuard did. The key to WatchGuard’s positive results was the head of HR’s leadership in HR and his focus on developing a truly employee-centric 401(k) plan. His approach to identifying three areas of focus enabled the company to set clear criteria for envisioning a future 401(k) plan. As seen above, the results are impressive. More employees started saving. The rate of savings increased, and with QDIA in the form of a managed account, each employee had the advice they needed to help maximize their money. With a clear focus on employees and decisive execution, WatchGuard made its employees’ retirement future more secure and the company’s plan a differentiating benefit. Citations 1 Based on a common sample of individuals employed by WatchGuard before and after implementation. Out of 282 employees at WatchGuard prior to February 28, 2017, 179 employees were participating in the 401(k) plan. 2 Based on the Deloitte 2017 Defined Contribution Benchmarking Survey. www2.deloitte.com/us/en/pages/human-capital/articles/annual-defined-contribution-benchmarking-survey.html 3 Analysis is reflective of employee accounts, not individual participants. Some participants could have multiple accounts, and some accounts may be left in the plan from past employees. Improper risk levels defined as ±7% from Betterment’s stock allocation advice specific to the individual’s age. 4 Appropriate risk is based upon Betterment’s stock allocation advice for the employees’ individual ages, with the assumed retirement age of 65. 5 Published examples include Save for Tomorrow: www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow 6 Forward-looking analysis for expected returns and total wealth created in WatchGuard’s plan is based on a Betterment-generated return projection. This assumes actual stock allocations by participant as of Aug. 28, 2017, with annual return and volatility assumptions. The analysis includes reinvestment of dividends. The impact of trading and other income is not considered. Actual results may differ significantly from the value shown. The analysis is hypothetical in nature, does not represent actual returns attained, and does not take into account any possible economic or market conditions. This hypothetical illustration does not reflect the potential for loss or gain. This comparison uses WatchGuard’s specific fees paid to Betterment for Business. 7 WatchGuard’s previous 401(k) plan had 22 funds for employees to choose from. Other plans may have more or less funds, but fund selection is a convention of most non-QDIA plans. 8 88 accounts in the plan had stock allocations that fell below Betterment for Business’ stock allocation advice range (underinvested in stocks). Seven plan participants who were near or at retirement (64-67 years of age) had 90% stock allocations or higher, 34 to 45% higher than Betterment for Business’ stock allocation advice. In total 205 accounts (60.3%) were considered improperly allocated according to the advisor. Disclaimer This study was analyzed based on results in 2017 and may not apply to all clients, as past performance is not indicative of future performance. -
Employee Retirement Preparedness: Millennials And Gen Z
Employee Retirement Preparedness: Millennials And Gen Z Unlike their predecessors, millennials and Gen Z-ers are facing changing economic, social and demographic trends that raise worrisome questions about retirement security. Millennials now make up the largest portion of the U.S. labor force, with Gen Z rapidly entering the workforce as well. Unlike their predecessors, these generations are facing changing economic, social and demographic trends that raise worrisome questions about retirement security. However, despite substantial focus on retirement products and services from the financial services industry, a large majority of millennials and Gen Z are still not adequately preparing for retirement. Betterment for Business’ survey “Employee Retirement Preparedness: Millennials and Gen Z,” tracks the financial well-being and retirement preparedness of full-time employed U.S. millennials and Gen Z. The goal is to understand the attitudes and behavioral constraints preventing these generations of workers from taking better control of their retirement and financial wellness. These insights can then be used to help financial institutions and advisers provide better advice and solutions to these customers. We also want to uncover just how knowledgeable this cohort is about basic 401(k) and retirement plans. With the decline of pensions and workers becoming increasingly responsible for saving for retirement on their own, that knowledge is more essential than ever before. The Good, The Bad And The Ugly: Millennial And Gen Z Finances Every generation is shaped by its circumstances — millennials and Gen Z are no exception. How are these two younger generations faring when it comes to finances? The bad news: There’s no doubt about it — younger generations are stressed about finances. 77% say that thinking about finances causes them stress. 20% are saving less than $100 monthly—including their 401(k) and other retirement savings accounts. Cash flow and debt challenges continue to inhibit responsible savings practices. 28% also receive some type of financial assistance from parents and/or family — no surprise for a generation coming of age during the 2008 recession and dealing with record high costs of housing and healthcare. The good news: Despite the challenges they face (or maybe because of them), these two generations are still trying to save for retirement as early as possible. They know they should be saving, but they still need help prioritizing, due to so many other financial stressors. 71% of Gen Z and 82% of millennials say they do not feel too young to start saving for retirement. 88% are actively saving some money on a monthly basis (including their retirement savings plan). 73% are contributing at least 3% of their monthly salary to their retirement savings plan. 23% are saving over 8% of their monthly salary for retirement savings. Figure 1: How much are Millennials and Gen Z saving each month? On average, how much money do you save on a monthly basis including your 401(k) retirement account? Challenges Of Unprecedented Debt Unprecedented debt is dragging down both generations, delaying financial priorities and negatively impacting attitudes toward retirement. Credit card debt makes up the largest debt segment — 75% of respondents said they owe some credit card debt and almost one in three owes more than $5000. To add to that, almost half (47%) of respondents currently owe some level of student debt. Those with high levels of debt may need to significantly reduce their current spending rates, or face substantial lifestyle changes down the line — perhaps even having to work beyond their traditional retirement age or sacrificing desired spending in retirement. Figure 2: Here's how student loan debt impacts financial decisions and behavior Conflicting Priorities While it seems as though most millennials and Gen Z understand the importance of saving for retirement, many have short-term concerns that take precedent over long-term planning. Each month, immediate financial demands and desires leave little left for long term savings — from rent and utilities to minimum debt payments and health insurance; from groceries and children or pets to vacations and local events. Behaviorally, it’s unsurprising: day-to-day life and needs are a visceral experience, more easily felt and understood than an account to prepare for life in 30+ years. Figure 3: Financial priorities: Millennials vs. Gen Z Percent indicating the following was one of their top financial priorities. 1 in 3 respondents are dipping into retirement funds early. One of our more concerning findings is that one in three respondents has dipped into their retirement funds early. Life doesn’t always go according to plan — 38% of respondents had to dip into their retirement savings account because of unexpected expenses such as medical debt. Individuals can often tap their 401(k) early via hardship withdrawal, but this comes with risks and consequences and should only be considered as a last resort. However, what is most alarming is that almost a quarter (23%) said they dipped into their accounts to fund travel / leisure activities. Not only are they putting their ability to retire at risk and losing out on compounding investment growth, but early cash outs of retirement savings (whether cashing out a 401(k) from a former employer or dipping into an IRA) often means a 10% tax penalty on top of income taxes for the withdrawal. Dipping into retirement savings for vacation impedes on future success. In essence, employees are starting in the right direction by putting away money for retirement but they’re not staying on track by preserving it for retirement as they should. Instead, they see it as another pool of money to be tapped into if and when ‘needs’ arise. Employers need to do more to help people recognize the benefits of keeping this money for retirement and letting it stay invested to work harder for them. We should note that while it’s easy to point to vacations as frivolous use of intended long-term savings, a greater portion of respondents tapped savings for medical expenses and debt payments; employers looking to address poor usage of retirement savings should blend education with broader wellness measures. Figure 4: Why Millennials and Gen Z are dipping into retirement savings early 1 in 3 respondents have dipped into their retirement funds early. Reasons why: Finally, many millennials and Gen Z may be falling behind on their retirement savings for a number of reasons: the decision making process (how much to save, how to invest, which accounts to use) can cause action paralysis; they may have been auto-enrolled at low, insufficient rates; or the compounding value of taking action today didn’t resonate or translate to action. Almost half (44%) of respondents have a retirement savings goal of under $1 million. The reality is that the right level of savings varies by person based on a number of factors; everything from what you earn today, where you live and how you spend, where and when you intend to retire, and how you plan to invest now and through retirement. That’s a lot to sink into one number. Betterment for Business suggests using tools that have clear assumptions for those factors and allows you to adjust as you see fit. Such tools help you understand how actions you take today help you meet your goals — not solely focused on an arbitrary-seeming number, but rather on a projected income level you can create in retirement. Saving and investing decisions have a more visceral feeling if you can compare it to your lifestyle in today’s dollars. Respondents know they need to save, but need help getting over the initial hurdles — deciding how much and where to save — and how to preserve the hard work they’ve put into savings, by investing well for the long term and avoiding cash outs and drains on future income for today’s needs. The new face of retirement. Once upon a time, when earlier generations had to walk to school in the snow uphill both ways, traditional pensions were the predominant form of retirement security. In 1980, 38% of workers in the U.S. had a pension plan. With these traditional pension plans, employers were responsible for managing the investments, and employees, once retired, could expect set monthly payments for as long as they lived. Yet by 2017, only 18% of private-sector workers had access to a pension; many surviving plans are also frozen, meaning they do not cover new employees. Instead, the majority of today’s workers participate in defined contribution plans — primarily 401(k)s. The shift away from traditional pensions has left many workers unprepared and unaware of how much they should be saving for retirement. Helping workers understand how to start investing, managing debt, and save for retirement has never been more important, especially given that younger generations are increasingly pessimistic about their retirement. Figure 5: Millennials and Gen Z expect to retire later, or never at all What benefits are employers offering now? 72% say their employers offer a retirement savings plan. (80% of these respondents say their company matches their contributions to the retirement savings plan). 48% say employers are also offering financial wellness benefits, such as workplace programs and resources that support the financial wellness of employees. More good news: The majority of surveyed employees leveraging employer retirement benefits are using them to their advantage: 75% are maximizing their company’s match. 90%are contributing some money to their plan. Almost half (48%) are contributing 5% or more to their retirement savings plan monthly. 50% have increased their monthly contribution over the last 12 months. Are women less prepared for retirement? We found that overall, men are more engaged than women when it comes to workplace retirement savings plans. A number of societal factors could be behind this: there still exists a significant disparity in how men and women are paid, with women earning on average 79 cents for every dollar earned by men; women are more likely to pause work to raise families or care for elder family members; and women often don’t invest with the same confidence as men. On the flip side, it’s even more critical for women to save and invest for retirement early and often — not only do they need to make up for lower wages and fewer years in the workforce, but they need to plan for a longer retirement, given their longer average lifespans than men. When evaluating retirement savings plan utilization, employers should pay attention to gender disparity and consider ways to reach all employees. Figure 6: Where women are falling behind on retirement preparation Even employers who are committed to gender equality may not realize the size of this disparity in utilization and preparedness. To correct it, they will have to take intentional and proactive measures, like understanding their employee’s needs and helping them more conservatively manage longevity risk — to ensure women are taking full advantage of benefits and preparing properly for retirement. Gig Workers And Benefits The future of work continues to shift towards part-time/gig work, and we’re beginning to see debates around offering benefits to this segment of the workforce. California recently signed a law forcing gig companies like Uber and Lyft to reclassify their workers as employees, which would make them eligible for benefits. Gig employers to date have been hesitant to classify workers as employees and offer them benefits, but popular sentiment is against them: over three- quarters of our respondents think that companies employing gig workers should offer them retirement plan benefits. Regardless of where the law lands on the treatment of the growing number of gig workers as contractors or employees, respondents felt strongly that companies should think more broadly about how to make it easier for all workers to save through retirement. Education, access to financial advice, and introduction to providers that make saving easy are just starting points for companies to consider. Figure 7: Should companies employing gig-workers offer them retirement benefits? Helping employees get a better handle on their retirement savings. 39% of respondents indicated they have funds in one or more former retirement savings plan (from a previous job, etc). Of these respondents, nearly a quarter (23%) indicated the reason is because they don’t know how to roll over these funds. Consolidating retirement accounts, or at least being able to see information about each in one place, makes planning and execution of decisions far easier. Having separate accounts scattered across past plans also makes it difficult to invest well, assess fees, and make decisions about how to manage those assets, nevermind increasing the likelihood of losing track of savings. Plus, past employers can force out smaller balances, sometimes cashing out those benefits (further reducing savings kept for retirement use). The above is a good problem to have — employees that are engaged and have savings in former plans are on the right path. Employers should help them make the most of their traction by: Making it easy to consolidate their retirement savings (via rollovers into the 401(k) plan, or choosing a provider that can help employees handle rollovers and see outside accounts in one place). Setting appropriate default savings rate for their plans, to keep the momentum going. Providing tools that make it easy for employees to understand where on their savings journey they are, and their next best steps toward a successful retirement. Conclusion The economic outlook is relatively positive, salaries and bonuses at an all-time high and interest rates at historical lows; yet burdened by debt and additional financial stressors, our survey finds younger generations of employees are still struggling with their long-term financial goals. Retirement plans continue to serve as a backup plan for many who don’t have money set aside for an emergency or unexpected expenses. The U.S. retirement landscape has changed dramatically over the past few decades. Health care costs are increasing, and so is longevity — which means workers today don’t just have more responsibility for saving for their own retirements, they also have to make those savings last, on average, for longer periods of time. Planning for retirement is now significantly more challenging. The future of retirement will look very different for these next generations and more will be looking to employers for help navigating the personal financial issues that are part of their changing environment. Employers should help employees save more. This report shows where employees are struggling and actions employers can take: Help employees manage financial stressors by providing education and tools that look at their whole financial picture, not disjointed, piecemeal information. Help them understand the benefits of starting to save early and increase their contribution rates over time, showing the impact of small changes on future incomes they can create. Target additional educational and support efforts at women so they don’t lag in their contributions. Help employees understand the benefits of consolidating assets into their current plan. Educate employees about the dangers of using retirement savings to fund other goals/needs/wants. Saving for retirement is about far more than picking funds and what to save that year; it’s about looking at employees’ broader financial pictures and how to best plan for their whole financial lives. Methodology An online survey was conducted with a panel of potential respondents. The recruitment period was September 27- October 1, 2019. A total of 1,001 respondents born between 1981-2001, living in the United States, who hold full-time jobs completed the survey. Of these a total of 695 millennials (born between 1981-1994) responded, and 306 Gen Z-ers (born between 1995-2001) responded. The sample was provided by Market Cube, are search panel company. Panel respondents were invited to take the survey via an email invitation and were incentivized to participate via the panel’s established points program. -
Betterment for Business Coronavirus Update
Betterment for Business Coronavirus Update Learn about the measures we have taken to ensure our team will be available as usual for you and your employees. In light of the growing concerns about COVID-19, also known as the coronavirus, we’d like to make you aware of the steps we have taken to ensure that our team will be available as usual for you and your employees. Operational Continuity: We have always had a flexible work environment at Betterment where employees can work remotely. In addition, we have opened two new offices (Philadelphia and Denver) in the past year which provide additional geographic diversity. In the event that we need to employ a mandatory work from home policy for our team, we are well-equipped to continue with business as usual and have implemented protocols and tools to minimize potential adverse impacts and maintain continuity of our operations. Market Volatility: We know that market volatility can be stressful. Your employees will see a message about market volatility when they log into their account. We encourage you to reinforce that message by directing employees to Betterment articles and remind them that 401(k)s are long-term investments meant for retirement. The best path to long-term investing success is for investors to be sure they are taking the right amount of risk for their goals, saving, and sticking to their plan. Rollover Checks: Effective immediately, all rollover checks should be sent to our lockbox at: If regular mail: Betterment 401(k) PO Box 208435 Dallas, TX 75320-8435 If overnighting by special courier: Lockbox Services 208435 (include above in Reference Section) Betterment 401(k) 2975 Regent Blvd, Suite 100 Irving, TX 75063 Kindly update your internal guidance to provide employees with this information. Checks that are already on their way to our NYC office will be forwarded to the lockbox; however, there may be some short delays as a result. Distributions: As a reminder, termination distributions can be done online, and all other paper distributions should be sent to Betterment via our secure upload site. We know that this can be a stressful time. If you need anything from us or have any questions, please let us know. -
401(k) Plan Fiduciary: How You Can Mitigate Your Risk
401(k) Plan Fiduciary: How You Can Mitigate Your Risk Fiduciary responsibilities can seem daunting and time-consuming. Learn the ins and outs of your responsibilities and which ones you can delegate. You probably know that to compete in attracting new talent and retaining your best employees, a 401(k) plan has become a “must-have” benefit. Sponsoring a 401(k) plan, however, comes with both administrative and investment responsibilities. If not managed properly, these duties can be a distraction that not only takes precious time away from building your business, but can also create legal risks for you and your company. If you are just starting a 401(k) plan, make certain you understand which services will be performed by whomever you hire to administer your plan and which retirement plan tasks fall to you. A Brief History of the 401(k) Plan and Fiduciary Duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Fiduciaries must always act in the best interests of employees who save in the plan. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor is the government agency responsible for providing guidance regarding ERISA fiduciary requirements and for enforcing these rules. Just like the laws and regulations that you must follow in operating your business, the tax laws and ERISA can feel like navigating a maze, with lots of twists and turns. But engaging skilled 401(k) service providers will help reduce the confusion and the burden of your retirement plan duties. Even 401(k)s of Small Businesses Come with Fiduciary Responsibilities By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities. First, you are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. Most companies hire one or more outside experts (such as an investment advisor, investment manager or third party administrator) to help them manage their fiduciary responsibilities. 5 Cornerstone Rules You Must Follow As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when you are making decisions regarding plan operations. There are five cornerstone rules you must follow as an ERISA fiduciary. Each decision you make regarding your plan must be based solely on what is best for your employees who participate in the plan, and their beneficiaries. You must act prudently. Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of your responsibilities, you will need to engage professionals who have that expertise such as investment managers or recordkeepers. You must diversify investments to the extent needed to reduce the risk of large losses to plan assets. You must follow the terms of the plan document when operating your plan. Fees from plan assets must be reasonable and for services that are necessary for your plan. There are detailed DOL rules that outline the steps you must take to fulfill this fiduciary responsibility including collecting fee disclosures for investments and service providers and comparing (or benchmarking) the fees to make certain they are reasonable. Fiduciary Responsibilities are Serious Business Fiduciary responsibilities should not be taken lightly. Employees who participate in the plan, as well as other plan fiduciaries, have the right to bring a lawsuit to correct fiduciary wrongdoing. The DOL also has the authority to enforce the rules through civil and criminal actions. Not only can the cost of governmental penalties associated with enforcement be high, but the costs associated with fixing the problem can also be significant. These normally involve legal, accounting, and other fees. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of their fiduciary responsibilities and may be required to: restore plan losses (including interest), and pay the expenses relating to the correction of inappropriate actions. While the list of fiduciary responsibilities from above can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals. Hiring 401(k) experts to manage your plan investments and operations can be a fiduciary decision. This means you should make the decision carefully. Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring the investment professionals and administrators for your plan. How much responsibility you retain and how much will be handled by the outside expert will vary depending upon the level of fiduciary responsibility provided by the entities you select. This is especially true when selecting investment professionals to support the 401(k) plan. For purposes of this article, we will focus primarily on investment support services since that is often the most challenging aspect of 401(k) plan oversight for employers. This also typically poses the greatest regulatory and legal risk. Different Levels of Investment Support In most 401(k) products, you, as the plan fiduciary, are responsible for selecting and monitoring the investments that will be available to your employees through the plan. A growing number of employers have become the target of lawsuits alleging violations of fiduciary duty by selecting poor- performing or more expensive investments compared to comparable investments. For most employers, day-to-day business responsibilities leave little time for extensive investment research and analysis, including fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties. As outlined in the table below, the degree of investment fiduciary responsibility assumed by the outside experts can vary greatly, which has implications for you as an employer. Defined in ERISA Section Outside Expert Employer n/a Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary responsibility Relieves employer of investment fiduciary responsibility Delegating All of Your Investment Responsibilities The decision to hire an investment manager is a fiduciary function. However, once appointed, a 3(38) investment manager will take on the following duties below, moving them off your to-do list. Development of an investment policy statement (IPS) that defines the strategic objectives for the plan's investments and the criteria that will be used to evaluate investments. Creation of the due diligence process for selecting and monitoring investments for your 401(k) plan. Monitor investment performance against the criteria outlined in the IPS and replace investments when an investment does not perform well or when comparable investments with lower fees become available. When you appoint an ERISA 3(38) investment manager, you have fully delegated responsibility for selecting and monitoring plan investments to the investment manager. Your obligation is to prudently select the investment manager—ensuring they have the credentials and track record to support your plan—and to make certain they are meeting their duties. Responsibilities You Can’t Delegate Because selecting an ERISA 3(38) investment manager and delegating your investment responsibilities provides a significant reduction in your fiduciary responsibilities, ERISA requires that you monitor their work. On a regular basis, carefully review the reports provided by any outside investment experts you hire. In addition to reviewing your plan’s investment performance and fees, you should also identify any issues that arose with respect to investment support. For example: Were there any participant complaints or concerns regarding investment services? If so, were all issues addressed timely and appropriately? Were there any interruptions in participants’ access to investment tools or resources? A more formal and in-depth review of the plan’s outside experts should be conducted periodically to ensure that they are meeting your organization’s needs. Items to consider include: Business Structure: Have there been any changes in business structure or licensing that impact the investment management services being delivered to your plan? Litigation or Regulatory Enforcement: Have there been any recent litigation or regulatory enforcement actions that have been taken against the firm? Modifications in Services: Evaluate notices received from the service provider or changes in practices that have occurred since they were retained. Do these changes impact the level of service you were seeking from the service provider? Staffing Changes: Have there been changes in the staff assigned to support your plan or in the team that manages your plan’s investments? Could the changes have a negative impact on the services provided to your plan? Reasonable Fees: Review the investment fees during the plan year to ensure they were reasonable. Did the actual fees charged match the fees set forth in the service agreement? Do the fees still benchmark favorably against fees charged by other service providers for similar services? Employee Engagement: How many employees have set both short-term and long-term savings goals? How many have provided sufficient demographic information to personalize their savings goals? The Bottom Line on Being a 401(K) Fiduciary Sponsoring a 401(k) plan comes with a complex set of responsibilities, but prudently selecting the right team of outside experts, especially when it comes to investments, can help you manage your responsibilities and potential liability. -
The SECURE Act is Changing the Retirement Landscape
The SECURE Act is Changing the Retirement Landscape The SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) into law. An extensive piece of bipartisan legislation, the SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. What Does the SECURE Act Mean to You and Your Employees? As an employer, you’re tasked with working with your retirement plan provider to implement the provisions of the SECURE Act that impact your employees. One of the most exciting benefits of the SECURE Act is valuable tax credits for small businesses, but there are many other important considerations you should know about. Read on for details about these new rules (and how they can impact you). 1. Tax credit for new plans Thanks to these new rules, substantial tax credits will be available for employers with 100 or fewer employees. That’s great news for small businesses who’ve been on the fence about starting a defined contribution plan because of cost concerns. Prior to the passage of the SECURE Act, the Retirement Plans Startup Costs Tax Credit was $500. However, effective January 1, 2020, you may now be able to claim tax credits of 50% of the cost to establish and administer a plan, up to the greater of: $500; or the lesser of: $250 per eligible non-highly compensated employee eligible for the plan; and $5,000 Plus, the new rules state that you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits! And remember, unlike tax deductions that reduce your company’s taxable income, tax credits actually reduce the amount of tax you owe dollar for dollar. It’s important to note that this tax credit is only available when you’re establishing a new retirement plan, such as a 401(k) plan. Ready to learn more about starting your own retirement plan? Betterment can help. 2. Tax credit for adding eligible automatic enrollment Small businesses can now earn an additional $500 tax credit for adding an eligible automatic enrollment feature to their new or existing plan. This tax credit—known formally as the Small Employer Automatic Enrollment Credit—is available for each of the first three years the feature is active, for a total of $1,500 in tax credits. Beyond the tax credit, automatic enrollment correlates with higher plan participation rates—and helps employees save for a more comfortable future. In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! Learn how your small business can benefit from a 401(k) plan with automatic enrollment now. Does your small business qualify for these valuable tax credits? Your small business may be eligible if you can answer “yes” to the following questions: Do you have 100 or fewer employees? Did you pay each of them at least $5,000 last year? Was there at least one “non-highly compensated employee” who earned less than $120,000 last year? If so, you could enjoy valuable tax credits—and help your employees save for retirement in the process. Want to learn more? Talk to Betterment. 3. More flexible safe harbor rules A safe harbor 401(k) plan offers a great way to avoid the stress of annual nondiscrimination testing while helping your employees build a more comfortable future. The SECURE Act modifies a few of the safe harbor provisions to give you more flexibility—and your employees the opportunity for increased lifetime income. Here’s what changed: More relaxed nonelective employer contribution requirements Before—Your plan document had to include the 3% nonelective safe harbor provision—and participants had to be provided with the safe harbor status notice—before the beginning of the plan year. After—The SECURE Act eliminated the participant notice requirement for nonelective contributions. Plus, you can amend the 401(k) plan as late as 30 days before the end of a plan year to provide for a 3% nonelective safe harbor contribution. Alternatively, a 401(k) plan may be amended as late as the end of the following plan year, if a 4% nonelective safe harbor contribution is provided. (Note that these changes don’t apply to safe harbor matching contributions.) Increase in the automatic deferral rate for qualified automatic contribution arrangements (QACA) Before—A QACA safe harbor was permitted to automatically increase a participant’s deferral election up to 10% of eligible compensation. After—The SECURE Act increased the cap from 10% of eligible compensation to 15% of eligible compensation. That means that you have an even greater opportunity to help employees save the lifetime income they need to thrive in retirement. Need help with your safe harbor 401(k) plan? These new SECURE Act changes have many implications, including revisions to your policies, procedures, participant notices, plan documents, and more. Betterment can help. 4. Expanded eligibility for long-term, part-time employees Currently, 401(k) plans can limit access for employees who work under 1,000 hours per year, which averages out to about 20 hours per week. However, the SECURE Act changes that rule—helping part-time workers get a jumpstart on retirement saving. Beginning in 2021, plans must provide access for part-time workers who haven’t met 1,000 hours in one year, but have worked for over 500 hours for an employer for at least three years. This change is a great opportunity for large and small companies alike to improve retirement access for all individuals in their workforce. Plus, offering part-time workers a 401(k) plan is an effective way to boost your recruiting efforts. 5. Bigger penalties for late filing To improve deadline compliance, the new rules increase the penalties for late retirement plan document filings: Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. (Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.) Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000. (Before the SECURE Act, the daily penalty was $1 per participant, not to exceed $5,000.) Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year. (Before the SECURE Act, the penalty was $10 for each failure, not to exceed $5,000.) So, what do these new rules mean to you? Well, it’s more important than ever to file your forms in a timely manner—or face significant financial repercussions. To make it easier for you, Betterment helps you prepare your Form 5500—and offers the support you need throughout the process. 6. Higher required minimum distribution (RMD) age Prior to the passage of the SECURE Act, employees needed to take RMDs from their IRAs and qualified employer-sponsored retirement plans (like 401(k)s) at age 70 ½. Now, they can take them beginning at age 72—allowing extra time for earnings to potentially accumulate. This is great news for retirement savers who now have more opportunity to accumulate the lifetime income they need. It’s important to note that unlike Traditional IRAs and 401(k) plans, there are no RMDs for Roth IRAs during the account owners’ lifetime. So if employees have a Roth 401(k) account, they can roll it into a Roth IRA, avoid taking RMDs, and continue building lifetime income. 7. Penalty-free withdrawals for birth/adoption expenses and student loan payments Offering a welcome financial respite, the SECURE Act provides provisions for two brand-new penalty-free distributions: Birth or adoption—Now people can withdraw up to $5,000 from their qualified retirement accounts—without paying the usual 10% early withdrawal penalty—to cover expenses related to a birth or adoption. However, account owners will still be liable for the applicable income taxes, including those for any capital gains. Student loan payment using 529 plan—Now, people can use their 529 plan to pay the costs of apprenticeship and student loan payments. Specifically, account owners can withdraw up to $10,000 during the beneficiary and their siblings’ lifetimes. For example, a family with three children can take a $10,000 distribution to pay student loans for each child—for a total of $30,000. However, it’s important to note that any student loan interest that’s paid with tax-free 529 plan earnings can’t also be claimed as a tax deduction. Both of these new penalty-free distributions offer more flexibility to pay for important lifetime expenses. With this newfound freedom, individuals have greater opportunity to pay down debt and gain more secure financial footing. 8. Required retirement projections for employees Rather than just reporting a lump sum of what employees have saved, retirement plans will now be required to project expected income at retirement. With this retirement income projection, employees will have a better idea of what their future will look like (and whether they’re on—or off—track for retirement). While the retirement income projection requirement is a new rule, Betterment for Business already offers this level of insight for current 401(k) plan participants. In fact, our intuitive investment platform ensures that employees can get advice on all of their financial goals in one place. We aim to help employees set a clear, realistic retirement goal and stay on track to achieve that goal. In this way, it is an elaboration on the fundamentals of our goal-based approach to financial planning. We aim to include the following components of retirement planning: Projecting an estimate of desired spending in retirement -- We use several factors to help estimate retirement spending, including how earned income will grow over time, what the local cost of living will be like, and what an individual’s spending habits look like before retirement. Determining the total pre-tax savings amount likely needed to achieve that spending level with high confidence -- we can figure out the total amount an individual should have saved by the time of their desired retirement date to have a 96% chance of success they will not run out of money during retirement. Considerations include expected lifespan, other retirement income sources, and taxes. Calculating how much should be saved during each period prior to retirement -- The savings amount required depends on how much time remains until retirement age, the level of risk someone is willing to bear in order to pursue higher returns, and how much certainty they feel they need to hit that balance. Prioritizing which retirement savings vehicles are likely to be most efficient -- Prioritizing which accounts people save into depends on their specific tax situation and access to retirement accounts. Our recommendation for retirement goals only incorporates the external accounts that an employee has synced and any Betterment accounts within their Retirement goal. As always, we recommend individuals contact a qualified tax advisor to understand their personal situation. 9. New regulations for pooled employer plans Starting in 2021, unrelated companies can join a single Pooled Employer Plan (PEP) in an effort to access greater economies of scale and cost efficiencies. Prior to the new rules, “open” Multiple Employer Plans (MEPs) existed; however, there were concerns about how the DOL viewed them. This new regulation solidifies PEPs as an option for employers who are looking to lower their fees, reduce their fiduciary liability, and offer their employees a higher quality retirement plan. However, Betterment offers the key benefits of a pooled employer plan—lower fees and reduced fiduciary liability—with less complexity and greater personalization. Here’s how: Lower fees: Fees on Betterment plans are some of the lowest available, so there’s no need to compromise on a pooled plan that may not meet all of your needs or provide the flexibility you may want. Reduced fiduciary liability: We serve as a 3(16) administrative fiduciary and 3(38) investment fiduciary to your plan. This limits your risk exposure and allows you to focus more of your time on running your business--not your plan. Greater personalization: We’ll partner with you on your 401(k) plan design so you can tailor it to meet your company’s needs—from adding a safe harbor provision to electing an automatic enrollment feature. Don’t your employees deserve a better 401(k) plan? Get the Betterment 401(k) plan. 10. Deadline filing extension The SECURE Act also impacts the deadline for employers to establish a new 401(k) plan. Specifically, it extends this date from the last day of the tax year (December 31) to the due date of the tax return (April 15 of the next year). That’s good news for employers because you have an extra 3.5 months to set up a plan! Thinking about setting up a plan? Betterment can help tailor the plan that’s right for you. Want to learn more? We can help. The SECURE Act retirement bill contains 30 sections in all, which you can read about in more detail here. However, if you don’t want to sift through these dense regulations on your own, Betterment can help. As a full-service provider, we aim to make life easy for you by assisting with everything from compliance testing to plan design consulting. Not only do we provide highly optimized 401(k) plans, we also offer your employees high-tech retirement planning, a big picture view of their finances, and personalized advice—all at a fraction of the cost of most providers. -
6 Ways to Retain Top Talent with Financial Wellness
6 Ways to Retain Top Talent with Financial Wellness Beyond just handing over a paycheck, supporting your employees’ financial wellness plays a crucial part in employee happiness, performance, and retention. Employee financial wellness might sound like a concern that’s outside your purview. As an employer, it would be understandable if your only goal was to pay your employees well and call it a day. On the other hand, supporting your employees’ financial wellness plays a crucial part in employee happiness, performance, and retention. Taking the time to encourage employee financial wellness will help your business level up from being just a transactional employer. Beyond just handing over a paycheck, you can make sure your employees are managing their financial worries, which are an enduring cause of stress in the United States. Here’s your guide to why you should support employee financial wellness and the best ways to financially empower your business’s team: Why Support Employee Financial Wellness? Generally speaking, employee financial wellness helps achieve most of the main goals of HR for small business. People in the U.S., no matter how well-paid or fiscally responsible they are, tend to have debt. Whether they spend with a credit card, have a mortgage, are paying off student loans, or all of the above, the average American household has $137,063 in debt. Chances are, a solid proportion of your team is paying down—-and likely stressing about—a significant amount of similar debt. Helping employees to achieve a state of financial wellness will help them manage that stress. According to Prosperity Now, two-thirds of employees who are struggling financially report experiencing high levels of stress. Considering that more than 20% of workers spend five-plus hours on the clock each week thinking about their worries, your business may be losing untold productivity to this common, though avoidable, issue. Prosperity Now also found that 20% of employees who are struggling financially are in poor physical health. (Meanwhile, of employees who don’t have financial worries, only 4% are in poor physical health.) This link between financial wellness and physical wellness means fewer sick days, and that employees can be more intentional with their PTO—taking it to recharge, rather than deal with illness. Helping employees combat personal financial issues that lead to stress may result in greater employee retention, saving you additional money in the long run. A culture of support, transparency, positivity, and guidance can go a long way towards convincing employees to stay. Considering that, according to Zenefits, 63.3% of companies say retaining employees is harder than hiring them, anything you can do to combat turnover should be considered a priority. Ways to Support Employee Financial Wellness Supporting employee financial wellness is more concrete and straightforward than it might sound. Rather than vague encouragement or advice, it’s all about setting up programs and offering resources to employees. Here are five programs to set up to support the financial wellness of your entire team: 401(k) Benefits Get a better 401(k) for both you and your employees’ needs. Offering the structure of a 401(k) for retirement savings with a seamless plan will help ease your employees’ stress about their future retirement goals. Even then, however, basic 401(k) benefits are just a gateway to more effective employee retirement benefits. For instance, offering a 401(k) match could attract top talent, improve employee retention, and make on-time retirement all the more feasible. And the true cost of 401(k) matching is even more manageable than you might expect. That’s because investing in this program now could save your business untold sums down the road. Employee Assistance Programs An employee assistance program—or an EAP—is a fringe benefit that offers assistance to employees struggling with mental health challenges. Through an EAP, employees will be able to access mental health care with no out-of-pocket cost. For some, mental health care is a non-negotiable. But with the rising costs of mental health care, employees might not be able to afford it on their own—or will have to endure significant financial stress to do so. Offering an EAP to your employees will not only help them avoid the financial stress of paying for costly mental health care, but it will also encourage them to seek the treatment that will help them thrive both in and outside of the workplace. Debt Management Courses Offering courses on debt management can help assuage this common source of stress. Such courses can not only help employees more efficiently pay down debt, but they can also help them feel more in control of their finances. Either way, consider rewarding your employees for taking their course(s) by offering a party or catered lunch if the entire team reviews the resources you provide for them. Financial Planning Classes All employees—even those without debt—could learn a thing or two about financial planning. It’s long been said that schools should teach some of the basics of financial planning, from creating a personal budget to the most sensible retirement account based on your age and income, to utilizing HSAs and automatic savings programs. It may be up to your business instead to teach employees what steps to take to secure their financial futures. Offer general financial planning courses to your team to help them understand the ins and outs of financial literacy. (The two sites above are good places to start, though a variety of courses* exist at different price points, including free.) The things they learn from these courses will help empower them to manage their finances and provide them with a sense of agency in handling their wealth. Beyond just helping employees enhance their financial knowledge, these classes will help change your employees’ outlook, making them less stressed, more productive, and more engaged in the workplace. Employee Benefit Information Sessions Another way you can help make sure your team takes full advantage of all the employee financial wellness benefits you offer is to have your HR team provide information sessions to your employees. We suggest explaining how to best take advantage of the benefits you offer. Make sure that every new employee understands every benefit they have access to, and provide refreshers to more tenured employees on a regular basis. After all, the onus will fall on employees to use the financial wellness systems you provide them with—make it easy for them to do so. Takeaways for Employee Financial Wellness Programs Supporting employee financial wellness is about making sure that your team’s most common stressor is manageable. Helping your employees address and overcome common sources of financial strain will have lasting positive effects throughout the life of your business. All in all, offering financial wellness support to your employees will ultimately make financial wellness for your business as a whole that much easier to achieve. *Betterment may publish content that has been created by affiliated or unaffiliated contributors, who may include employees, other financial advisors, third-party authors who are paid a fee by Betterment, or other parties. Unless otherwise noted, the content of such posts does not necessarily represent the actual views or opinions of Betterment or any of its officers, directors, or employees. The opinions expressed by guest writer and/or article sources/interviewees are strictly their own and do not necessarily represent those of Betterment. About the Author Eric Goldschein is an editor and writer at Fundera, a marketplace for small business financial solutions such as small business loans. He covers financing, marketing, human resource solutions, and small business trends. -
Maximize Your 401(k): A Survey for Employers
Maximize Your 401(k): A Survey for Employers We asked Betterment 401(k) participants what they thought about employers offering a 401(k). Find out if it's still earning its place in the HR recruitment arsenal. In the 40 years since their creation, 401(k) plans have become a go-to way for employers to demonstrate their commitment to their employees’ financial wellness both during and after their working lives. But in a competition to see who can offer the trendiest benefits, is this tried-and-true offering still as valuable to employees as plan sponsors hope it is? We asked 845 Betterment for Business plan participants what they thought—and learned that the 401(k) is still earning its place in the human resources recruitment arsenal. 401(k)s are a valuable benefit for job seekers… 67% said that a good 401(k) was very important or important in their evaluation of a job offer 46% said offering a match played a role in the decision whether to take a job …and once they’re enrolled, plan participants care very much about their plan and their retirement outcomes 75% signed up for a 401(k) because they are concerned about and focused on their retirement readiness 64% check their accounts at least once a pay period 85% strongly agree or agree that it’s important that their plans have transparent and low-cost fees The full report details these themes and other takeaways for employers. Download and read The Staying Power of 401(k)s for the full story. -
Plan Sponsor Spotlight: Jessica Feldman @ Harry’s, Inc.
Plan Sponsor Spotlight: Jessica Feldman @ Harry’s, Inc. See what the Director of People Operations, at Harry’s, Inc. had to say about financial wellness for her team, why it’s important to offer a 401(k), and more. For our Plan Sponsor Spotlight, we spoke with Jessica Feldman, Director of People Operations at Harry’s, Inc., leading the strategy and implementation of People Operations including Benefits, Equity Admin, Payroll, HRIS, Compliance, Leave of Absence and Immigration. Read on to see what she had to say about what financial wellness means for her team, why it’s important to offer a 401(k), and more. What does financial wellness mean for you and your team? At Harry’s, we think about financial wellness as a key component of overall wellness. If an employee doesn’t feel positive about their financial well-being, it can have ripple effects on their lives both personally and professionally. For me, financial wellness means employees understand their financial situation and have a plan in place to continue to improve that situation for both their short term, medium-term, and longer-term financial goals. This means they can handle not only unexpected bills and expenses right now, but can also retire on a beach (or in the mountains or the city, wherever they want!) when they’re ready. Given this, it’s incredibly important that Harry’s supports employees by providing a holistic benefits package that helps with immediate and future financial needs. What are the most pressing questions your employees ask about their finances? We get a lot of questions from employees about how they can get the most value out of our benefit plans. This past year we made a lot of changes to our benefits, so we held open enrollment education sessions for all employees to have the opportunity to ask questions about the new plans. The number of people who realized they could benefit financially from a Flexible Spending Account (FSA) was quite remarkable. I loved seeing everyone’s minds working during that section of the presentation as they realized the potential tax saving benefits of an FSA! I received great follow up questions from employees wanting to ensure they knew how to best maximize the account before they enrolled. Why is it important to you and your company to offer a 401(k)? Offering a 401(k) plan is the best way to encourage employees to think about their longer-term financial needs and help them begin planning for the kind of financial future they want. Retirement can often seem far off and not like an immediate priority, but because of the benefits of compound interest, we know that the more people can save early in their career, the better off they’ll be 10, 20, 30, or even 40 years down the line. My parents once said, “you can get a loan to buy a house, but no one will loan you money for retirement.” I’ve carried that mantra with me as I’ve tried to personally prioritize saving for the long term, and have always made having a high quality, low cost 401(k) plan available for employees to do the same. How does technology help you manage your 401(k) plan, employee benefits, and HR processes more efficiently? What tools do you use? Prior to moving Harry’s to Betterment, we had a 401(k) provider with pretty outdated technology. It was hard to navigate, and transparency on fees and fund performance was difficult to find and often buried deep in their site. Our participation and engagement were low, with only around 25%-30% of our team enrolled in the plan. One of the key reasons we moved to Betterment was because of how strong and intuitive their technology is, and how transparency is a key value for their plans. I have often found that the higher the bar to enrollment (if it’s too hard to find info or there are too many funds to pick from) the less likely people will enroll, which is counter to the purpose of offering a 401(k) plan for our team. With Betterment’s technology, our participation is now around 90%. What do you think is the biggest opportunity for employers when it comes to overall workplace wellness? We constantly continue to explore this area ourselves, trying to ensure that our benefits are meeting the diverse needs of our population and encouraging wellness in all forms (mental, physical, financial, and more). As our team grows, these needs are bound to change, and we need to keep up to meet them. This past year we partnered with a primary care and insurance navigation company called Eden Health. The partnership offers many perks to our employees, including 24/7/365 primary care via their app, insurance navigation to help employees make sure they understand potential costs upfront, a growing network of private in-person medical offices, and integrated, free behavioral and mental health counseling with their in-house providers (among many other things). Having this partnership through Eden has been huge for our team since it gives our employees the peace of mind to know there is a dedicated team of healthcare providers out there helping them make smart, well informed, and cost-conscious decisions on their physical and mental health care. If you could give one piece of advice to your team, what would it be? I tried to come up with a better answer than “don’t wait,” but seriously, don’t wait. I started maxing out my 401(k) account as soon as I could spare the extra money from my checks. I’m still many years away from retirement, but knowing I’m doing what I can to maximize the ability for my contributions to compound over time makes me feel like I’m making real progress. I know not everyone can max out their account, but start with whatever you can, and slowly increase that each year. You’d be surprised how you learn to live off of what’s remaining. What does your dream retirement look like? I recently visited Isla Mujeres in Mexico where my fiancé and I drove around the island all afternoon on a golf cart. It was transformative! I’ve decided I don’t want to retire if my main mode of transit can’t be commuting via golf cart. -
Understanding 401(k) Nondiscrimination Testing
Understanding 401(k) Nondiscrimination Testing Discover what nondiscrimination testing is (and how to pass) If your company has a 401(k) plan—or if you’re considering starting one in the future—you’ve probably heard about nondiscrimination testing. But what is it really? And how do you help ensure your plan passes these important compliance tests? Read on for answers to the most frequently asked questions about nondiscrimination testing. What is nondiscrimination testing? Mandated by ERISA, annual nondiscrimination tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. We’ll dive deeper into nondiscrimination testing, but let’s first discuss an important component of 401(k) compliance: contribution limits. What contribution limits do I need to know about? Because of the tax advantages afforded 401(k) plan contributions, the IRS puts a limit on the amount that employers and employees can contribute. Here’s a quick overview of the important limits: Limit What is it? Notes for 2021 plan year Employee contribution limits (“402g”) Limits the amount a participant may contribute to the 401(k) plan. The personal limit is based on the calendar year.1 Note that traditional (pre-tax) and Roth (post-tax) contributions are added together (there aren’t separate limits for each). $19,500 is the maximum amount participants may contribute to their 401(k) plan for 2021. Participants age 50 or older during the year may defer an additional $6,500 in “catch-up” contributions if permitted by the plan. Total contribution limit (“415”) Limits the total contributions allocated to an eligible participant for the year. This includes employee contributions, all employer contributions and forfeiture allocations. Total employee and employer contributions cannot exceed total employee compensation for the year. $58,000 plus up to $6,500 in catch-up contributions (if permitted by the plan) for 2021. Cannot exceed total compensation. Employer contribution limit Employers’ total contributions (excluding employee deferrals) may not exceed 25% of eligible compensation for the plan year. N/A This limit is an IRS imposed limit based on the calendar year. Plans that use a ‘plan year’ not ending December 31st base their allocation limit on the year in which the plan year ends. This is different from the compensation limits, which are based on the start of the plan year. Adjusted annually; see most recent Cost of Living Adjustments table here. What is nondiscrimination testing designed to achieve? Essentially, nondiscrimination testing has three main goals: To measure employee retirement plan participation levels to ensure that the plan isn’t “discriminating” against lower-income employees (NHCEs) or favoring HCEs. To ensure that people of all income levels have equal access to—and awareness of—the company’s retirement plan. To encourage employers to be good stewards of their employees’ futures by making any necessary adjustments to level the playing field (such as matching employees’ contributions) How do I classify my employees by income level? And what do all these acronyms really mean? Before you embark on nondiscrimination testing, you’ll need to categorize your employees by income level and employee status. Here are the main categories (and acronyms): Highly compensated employee (HCE)—According to the IRS, an employee who meets one or more of the following criteria: Prior (lookback) year compensation—Earned over $130,000 in 2020; some plans may limit this to the top 20% of earners in 2020 (known as the top-paid group election); or Ownership in current or prior year—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation Non-highly compensated employee (NHCE)—Someone who does not meet the above criteria. Key employee—According to the IRS, an employee who meets one or more of the following criteria during the plan year: Ownership over 5%—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. Ownership over 1%—Owns more than 1% of the stock, voting power, capital, or profits, and earned more than $150,000. Officer—An officer of the employer who earned more than $185,000 for 2021; this may be limited to the lesser of 50 officers or the greater of 3 or 10% of the employee count. Non-key employee—Someone who does not meet the above criteria. What are the nondiscrimination tests that need to be performed? Below are the tests typically performed for 401(k) plans. Betterment will perform each of these tests on behalf of your plan and inform you of the results. 1. 410(b) Coverage Tests—These tests determine the ratios of employees eligible for and benefitting from the plan to show that the plan fairly covers your employee base. Specifically, these tests review the ratio of HCEs benefitting from the plan against the ratio of NHCEs benefitting from the plan. Typically, the NHCE percentage benefitting must be at least 70% or 0.7 times the percentage of HCEs considered benefitting for the year, or further testing is required. These annual tests are performed across different contribution types: employee contributions, employer matching contributions, after-tax contributions, and non-elective (employer, non-matching) contributions. 2. Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of non-highly compensated employees (NHCEs). This test includes pre-tax and Roth deferrals, but not catch-up contributions. Essentially, it measures the level of engagement of HCEs vs. NHCEs to make sure that high income earners aren’t saving at a significantly higher rate than the rest of the employee base. Specifically, two percentages are calculated: HCE ADP—The average deferral rate (ADR) for each HCE is calculated by dividing the employee’s elective deferrals by their salary. The HCE ADP is calculated by averaging the ADR for all eligible HCEs (even those who chose not to defer). NHCE ADP—The average deferral rate (ADR) for each NHCE is calculated by dividing the employee’s elective deferrals by their salary. The NHCE ADP is calculated by averaging the ADR for all eligible NHCEs (even those who chose not to defer). The following table shows how the IRS limits the disparity between HCE and NHCE average contribution rates. For example, if the NHCEs contributed 3%, the HCEs can only defer 5% (or less) on average. NHCE ADP HCE ADP 2% or less → NHCE% x 2 2-8% → NHCE% + 2 more than 8% → NHCE% x 1.25 3. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (So this test is only required if you make employer contributions.) Conveniently, the calculations and breakdowns are the same as with the ADP test, but the average contribution rate calculation includes both employer matching contributions and after-tax contributions. 4. Top-heavy determination—Evaluates whether or not the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. Simply put, it analyzes the accrued benefits between two groups: Key employees and non-Key employees. A plan is considered top-heavy when the total value (account balance with adjustments related to rollovers, terminated accounts, and a five-year lookback of distributions) of the Key employees’ plan accounts is greater than 60% of the total value (also adjusted as noted above) of the plan assets, as of the end of the prior plan year. (Exception: The first plan year is determined based on the last day of that year). If the plan is considered top-heavy for the year, employers must make a contribution to non-key employees. The top-heavy minimum contribution is the lesser of 3% of compensation or the highest percentage contributed for key employees. However, this can be reduced or avoided if no key employee makes or receives contributions for the year (including forfeiture allocations). What happens if my plan fails? If your plan fails the ADP and ACP tests, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by making additional employer contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. Why is it hard for 401(k) plans to pass nondiscrimination testing? It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-sizes businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but non-highly compensated employees (NHCEs) don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. How can I help my plan pass the tests? It pays to prepare for nondiscrimination testing. Here are a few tips that can make a difference: Make it easy to enroll in your plan—Is your 401(k) plan enrollment process confusing and cumbersome? If so, it might be stopping employees from enrolling. Consider partnering with a tech-savvy provider like Betterment that can help your employees enroll quickly and easily—and support them on every step of their retirement saving journey. Learn more now. Encourage your employees to save—Whether you send emails or host employee meetings, it’s important to get the word out about saving for retirement through the plan. That’s because the more NHCEs that participate, the better chance you have of passing the nondiscrimination tests. (Plus, you’re helping your staff prioritize their future.) Add automatic enrollment —By adding an auto-enrollment feature to your 401(k) plan, you can automatically deduct elective deferrals from your employees’ wages unless they elect not to contribute. It’s a simple way to boost participation rates and help your employees start saving. Add a safe harbor provision to your 401(k) plan—Avoid these time-consuming, headache-inducing compliance tests all together by electing a safe harbor 401(k) plan. What’s a safe harbor 401(k) plan? A safe harbor 401(k) plan is a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on behalf of your employees, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company. To fulfill safe harbor plan requirements, you can elect one of the following contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement. Interested in adding a safe harbor provision to your 401(k) plan? Find out more now. Did You Know? As a result of the SECURE Act, any 401(k) plan not utilizing a safe harbor match can be amended as late as 30 days before a plan year-end to provide the 3% safe harbor nonelective contribution for the plan year. How can Betterment help? We know that nondiscrimination testing and many other aspects of 401(k) plan administration can be complicated. That’s why we do everything in our power to help make it easier for you as a plan sponsor. In fact, we help with year-end compliance testing, including ADP/ACP testing, top-heavy testing, annual additions testing, deferral limit testing, and coverage testing. With our intuitive online platform, you can better manage your plan and get the support you need along the way. Plus, you can have it all for a fraction of the cost of other 401(k) providers. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The information contained in this article is meant to be informational only and does not constitute investment or tax advice. -
The True Cost of a 401(k) Employer Match
The True Cost of a 401(k) Employer Match Many companies are hesitant to start offering a 401(k) match program. Find out the truth behind matching employees’ 401(k) plan contributions. For a startup or a small business, 401(k) matches can seem like a worthy but unattainable benefit. Even larger companies may hesitate to offer a match if they haven’t previously provided one. According to SHRM’s 2017 Employee Benefits report, of the 90 percent of employers who offered a traditional 401(k) plan, 76 percent provided an employer match. So, while some executives may believe that matching employees’ 401(k) contributions is unpopular or will not be appreciated by employees, the evidence signals that neither is necessarily true. Believe it or not, employees tend to appreciate 401(k) matches. Employees often respond differently when they have a 401(k) match. Last year, EBRI and Greenwald & Associates’ found that nearly 73 percent of workers said they were likely to save for retirement if their contributions were matched by their employer. Let’s review the goals for employers offering a 401(k) match. First, matches are an important way employers can help employees stay on track for retirement; they can offer one way to build and extend an employee’s tenure with the company. Second, a match can add value to a 401(k) offering, helping to differentiate a total compensation package for job candidates. And these ideal outcomes aren’t just theory: A recent Betterment for Business study found that, for more than 45 percent of respondents, an employer’s decision to offer a 401(k) match was a factor in whether or not they took the job. That’s a relatively high demand for this type of benefit. Question the value of matches, but ask the right questions. Still, many employers tend to question the costs and benefits of matching 401(k) contributions. They often compare the value of a match to being more aggressive in their base salaries. And while making the right business move is critical, what many companies fail to evaluate effectively is the long-term cost of forgoing a match versus up-front costs of starting a match immediately. What are these long-term costs of forgoing a 401(k) match? Just look toward employee replacement and retention costs. When employers do not help facilitate employee retirement planning, they may be surprised by other costs that could rise, including higher relative salaries (beyond what might have been planned for), higher healthcare costs, or costs associated with loss of productivity. If these claims feel far-fetched, just look toward the research. According to a study from Prudential, every year an employee delays their retirement, it can cost their employer more than $50,000 due to a combination of factors including higher relative salaries, higher health care costs, younger employee retention through promotion, and several other elements. The storyline behind this find may be all too familiar to some employers: An older employee delays retirement due to insufficient savings; their productivity is hampered by health challenges, covered by employer-sponsored health insurance, and all the while, the company adapts to maintain productivity by hiring new people or advancing younger employees faster than anticipated. Eventually, when the older employer does retire, these costs only compound. These additional costs can sneak up on employers, aren’t always planned for effectively, and yet, they have a real business impact. For companies that may be less concerned with an aging employee population, forgoing matches can still contribute to rising retention and replacement costs due to the impact of financial distress on employee performance. In a SHRM survey measuring personal financial stress’s impact on employee performance, 47 percent of HR professionals noticed employees’ struggle with their “ability to focus on work.” Poor productivity not only costs the business in output, but it can inevitably lead to higher employee turnover, which, in turn, can lead to higher costs associated with retention and hiring. 401(k) matches may be your long-term competitive edge. Offering a 401(k) can be a step in the right direction, but whether you’re looking for ways to increase plan participation, design a good 401(k) plan or just help your employees focus on financial wellness, consider looking toward investing in a 401(k)-match program. With the costs that could be awaiting companies who don’t provide a match, maybe you can’t afford not to.
Meet some of our Experts
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Dan Egan is the VP of Behavioral Finance & Investing at Betterment. He has spent his career using ...
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Eric is Betterment's Head of Tax. His experience includes working for Ernst & Young and Fidelity ...
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Megan Fitzgerald is Legal Counsel at Betterment. Previously, she practiced law at Cravath, Swaine & ...
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Nick enjoys teaching others how to make sense of their complicated financial lives. Nick earned his ...
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